Investors signalled that they were pleased with WD-40 Company's (NASDAQ:WDFC) most recent earnings report. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.
See our latest analysis for WD-40
Examining Cashflow Against WD-40's Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
WD-40 has an accrual ratio of -0.14 for the year to November 2023. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of US$109m in the last year, which was a lot more than its statutory profit of US$69.2m. WD-40's free cash flow improved over the last year, which is generally good to see.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On WD-40's Profit Performance
As we discussed above, WD-40 has perfectly satisfactory free cash flow relative to profit. Because of this, we think WD-40's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 11% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Obviously, we love to consider the historical data to inform our opinion of a company. But it can be really valuable to consider what other analysts are forecasting. At Simply Wall St, we have analyst estimates which you can view by clicking here.
This note has only looked at a single factor that sheds light on the nature of WD-40's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.