Amgen – Does Amgen’s (NASDAQ:AMGN) Statutory Profit Adequately Reflect Its Underlying Profit?
Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Amgen’s (NASDAQ:AMGN) statutory profits are a good guide to its underlying earnings.
It’s good to see that over the last twelve months Amgen made a profit of US$7.35b on revenue of US$25.0b. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.
See our latest analysis for Amgen
Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. Today, we’ll discuss Amgen’s free cashflow relative to its earnings, and consider what that tells us about the company. 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.
Examining Cashflow Against Amgen’s Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company’s profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it’s worth noting when a company has a relatively high accrual ratio. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to September 2020, Amgen recorded an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of US$10b in the last year, which was a lot more than its statutory profit of US$7.35b. Amgen’s free cash flow improved over the last year, which is generally good to see.
Our Take On Amgen’s Profit Performance
As we discussed above, Amgen has perfectly satisfactory free cash flow relative to profit. Because of this, we think Amgen’s earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 13% per year over the last three years. 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. If you’d like to know more about Amgen as a business, it’s important to be aware of any risks it’s facing. You’d be interested to know, that we found 2 warning signs for Amgen and you’ll want to know about them.
Today we’ve zoomed in on a single data point to better understand the nature of Amgen’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.
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