We Think Vimeo's (NASDAQ:VMEO) Solid Earnings Are Understated

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Shareholders appeared to be happy with Vimeo, Inc.'s (NASDAQ:VMEO) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

See our latest analysis for Vimeo

earnings-and-revenue-history
NasdaqGS:VMEO Earnings and Revenue History November 12th 2024

Zooming In On Vimeo's 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. 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. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, Vimeo had an accrual ratio of -0.28. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of US$56m in the last year, which was a lot more than its statutory profit of US$33.2m. Vimeo's free cash flow improved over the last year, which is generally good to see.

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.

Our Take On Vimeo's Profit Performance

Happily for shareholders, Vimeo produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Vimeo's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. You'd be interested to know, that we found 1 warning sign for Vimeo and you'll want to know about it.

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