We Think You Can Look Beyond Ubiquiti's (NYSE:UI) Lackluster Earnings

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The market was pleased with the recent earnings report from Ubiquiti Inc. (NYSE:UI), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for Ubiquiti

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NYSE:UI Earnings and Revenue History November 16th 2024

Zooming In On Ubiquiti'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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, Ubiquiti had an accrual ratio of -0.42. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of US$696m, well over the US$390.2m it reported in profit. Given that Ubiquiti had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$696m would seem to be a step in the right direction.

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 Ubiquiti's Profit Performance

Happily for shareholders, Ubiquiti produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Ubiquiti's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 1 warning sign with Ubiquiti, and understanding it should be part of your investment process.

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