Why Sarepta Therapeutics' (NASDAQ:SRPT) Earnings Are Weaker Than They Seem

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The latest earnings release from Sarepta Therapeutics, Inc. (NASDAQ:SRPT ) disappointed investors. Our analysis found several concerning factors in the earnings report beyond the strong statutory profit number.

See our latest analysis for Sarepta Therapeutics

earnings-and-revenue-history
NasdaqGS:SRPT Earnings and Revenue History November 13th 2024

Zooming In On Sarepta Therapeutics' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's 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 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".

Sarepta Therapeutics has an accrual ratio of 0.79 for the year to September 2024. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of US$121.8m, a look at free cash flow indicates it actually burnt through US$480m in the last year. We also note that Sarepta Therapeutics' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$480m. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by US$37m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Sarepta Therapeutics' positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

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