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Even though Aurinia Pharmaceuticals Inc.'s (NASDAQ:AUPH) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.
Check out our latest analysis for Aurinia Pharmaceuticals
Examining Cashflow Against Aurinia Pharmaceuticals' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.
Aurinia Pharmaceuticals has an accrual ratio of -1.65 for the year to December 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$44m during the period, dwarfing its reported profit of US$5.75m. Given that Aurinia Pharmaceuticals had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$44m would seem to be a step in the right direction. 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?
Aurinia Pharmaceuticals' profit was reduced by unusual items worth US$23m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. In the twelve months to December 2024, Aurinia Pharmaceuticals had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.