Some May Be Optimistic About First Advantage's (NASDAQ:FA) Earnings

In This Article:

First Advantage Corporation's (NASDAQ:FA) earnings announcement last week didn't impress shareholders. However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.

See our latest analysis for First Advantage

earnings-and-revenue-history
NasdaqGS:FA Earnings and Revenue History November 19th 2024

Zooming In On First Advantage'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, First Advantage had an accrual ratio of -0.11. 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$142m in the last year, which was a lot more than its statutory profit of US$4.91m. First Advantage's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. However, that's not the end of the story. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. First Advantage expanded the number of shares on issue by 19% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of First Advantage's EPS by clicking here.

How Is Dilution Impacting First Advantage's Earnings Per Share (EPS)?

Unfortunately, First Advantage's profit is down 84% per year over three years. And even focusing only on the last twelve months, we see profit is down 88%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 88% in the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Waiting for permission
Allow microphone access to enable voice search

Try again.