Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding World Wrestling Entertainment (NYSE:WWE).
We like the fact that World Wrestling Entertainment made a profit of US$187.5m on its revenue of US$1.06b, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years.
Check out our latest analysis for World Wrestling Entertainment
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it’s well worth considering what World Wrestling Entertainment’s cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. 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.
Zooming In On World Wrestling Entertainment’s Earnings
Many investors haven’t heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company’s profit is backed up by free cash flow (FCF) during a given period. 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.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While it’s not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.
Over the twelve months to September 2020, World Wrestling Entertainment recorded an accrual ratio of -0.71. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$343m in the last year, which was a lot more than its statutory profit of US$187.5m. World Wrestling Entertainment’s free cash flow improved over the last year, which is generally good to see.
Our Take On World Wrestling Entertainment’s Profit Performance
As we discussed above, World Wrestling Entertainment’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that World Wrestling Entertainment’s statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate 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 want to do dive deeper into World Wrestling Entertainment, you’d also look into what risks it is currently facing. At Simply Wall St, we found 3 warning signs for World Wrestling Entertainment and we think they deserve your attention.
This note has only looked at a single factor that sheds light on the nature of World Wrestling Entertainment’s profit. But there are plenty of other ways to inform your opinion of a company. 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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