Intralot SA Integrated lottery systems and services (ATH:INLOT) just reported healthy earnings, but the stock price hasn’t moved much. Our analysis suggests investors may be missing out on some promising details.
See our latest analysis for Intralot Integrated Lottery Systems and Services
Review of Cash Flow vs. Revenue of Intralot Integrated Lottery Systems and Services
In high finance, the key ratio used to measure a company’s ability to convert reported earnings to free cash flow (FCF) is the exercise ratio (cash). Put simply, this ratio subtracts FCF from net income and divides that number by the company’s average operating assets over that period. The ratio shows us how much a company’s profit exceeds its FCF.
Therefore, it is actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having a accrual ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”
For the year to December 2021, Intralot Integrated Lottery Systems and Services had an accrual ratio of -0.15. This implies that it has a very good cash conversion and that its earnings last year significantly underestimate its free cash flow. Namely, it produced free cash flow of 84 million euros during the period, eclipsing its reported profit of 26.6 million euros. Intralot Integrated Lottery Systems and Services’ free cash flow has improved over the past year, which is generally good to see. That said, there is more to the story. The adjustment rate reflects the impact of unusual items on the statutory profit, at least in part.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of the balance sheet of Intralot integrated lottery systems and services.
How do unusual items affect earnings?
Intralot Integrated Lottery Systems and Services profit was reduced by unusual items worth €4.1 million in the last twelve months, which helped it produce high cash conversion, as evidenced by its unusual elements. In a scenario where these unusual items included non-cash charges, we would expect to see a strong accrual ratio, which is exactly what happened in this case. It’s never good to see unusual items cost the company profit, but on the bright side, things might improve sooner rather than later. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And, after all, that’s exactly what accounting terminology implies. If Intralot Integrated Lottery Systems and Services does not see these unusual expenses repeat, then all else being equal, we expect its earnings to grow in the coming year.
Our view on the profit performance of Intralot integrated lottery systems and services
Considering both the rate of regularization of Intralot’s integrated lottery systems and services and its unusual items, we believe that its statutory earnings are not likely to overstate the company’s underlying earning capacity. Based on these factors, we believe the revenue potential of Intralot’s integrated lottery systems and services is at least as good as it looks, and maybe even better! If you want to delve deeper into Intralot’s integrated lottery systems and services, you should also consider the risks it currently faces. When we did our research, we found 4 Warning Signs for Intralot Integrated Lottery Systems and Services (2 are concerning!) which we believe deserve your full attention.
After our review of the nature of Intralot Integrated Lottery Systems and Services’ earnings, we emerged optimistic for the company. But there’s always more to discover if you’re able to focus on the details. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders are buying. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.