There may be reason for hope in the disappointing results of WAG payment solutions (LON: WPS)

Low income doesn’t seem to be a concern Payment Solutions WAG plc (LON:WPS) shareholders over the past week. We dug in and we think the earnings are stronger than they look.

Check out our latest analysis of WAG payment solutions

LSE: WPS Revenue and Earnings History April 3, 2022

Focus on WAG payment solutions revenues

Many investors have not heard of the cash flow equalization ratio, but it’s actually a useful measure of how well a company’s earnings are supported by free cash flow (FCF) over a given period. 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 it’s fine to have a positive accrual ratio, indicating some level of non-monetary benefits, a high accrual ratio is arguably a bad thing, as it indicates that the earnings on paper do not match the cash flow. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.

WAG Payments Solutions has an accrual ratio of 0.29 for the year to December 2021. We can therefore infer that its free cash flow was well below covering its statutory profit, suggesting that we might want to think twice before putting much weight on the latter. . In the past twelve months, he had actually negative free cash flow, with a disbursement of €41 million despite its profit of €9.15 million mentioned above. We saw that FCF was 63 million a year ago, so WAG payment solutions have at least been able to generate positive FCF in the past. However, that’s not all there is to consider. It can be seen that unusual elements have impacted its statutory profit, and therefore the growth ratio. A positive for WAG Payments Solutions shareholders is that its accrual ratio was significantly better last year, giving reason to believe it may return to stronger cash conversion in the future. Shareholders should look for an improvement in cash flow over current year earnings, if that is indeed the case.

This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.

The impact of unusual items on earnings

Earnings from WAG Payment Solutions suffered from unusual items, which reduced earnings by EUR 13 million in the last twelve months. If it was a non-cash charge, it would have been easier to have a high cash conversion, so it’s surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing at first, there is a silver lining. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And that’s no surprise given that these line items are considered unusual. If WAG Payments Solutions does not see these unusual expenses repeat, all else being equal, we expect its earnings to grow in the coming year.

Earnings performance of our Take On WAG payment solutions

In conclusion, WAG Payment Solutions’ accrual rate suggests that its statutory revenue is not supported by cash flow, although unusual items weighed on earnings. Given the contrasting considerations, we have no definite opinion as to whether the earnings of WAG Payment Solutions accurately reflect its underlying profit potential. If you want to learn more about WAG payment solutions as a business, it is important to be aware of the risks it faces. To do this, you need to find out about the 2 warning signs we have spotted payment solutions with WAG (including 1 which is a bit unpleasant).

In this article, we’ve looked at a number of factors that can affect the usefulness of profit numbers as a guide for a business. But there are many other ways to inform your opinion about a company. Some people consider a high return on equity to be a good sign of a quality company. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.

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.

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