Fiverr International Ltd. (NYSE:FVRR) recently posted strong earnings and the market reacted positively. Our analysis revealed additional factors that we believe are good for shareholders.
Check out our latest analysis for Fiverr International
A closer look at Fiverr International’s revenue
An important financial metric used to measure how well a company converts its profit into free cash flow (FCF) is the Delimitation ratio. Simply put, this metric subtracts FCF from net income and divides that number by the company’s average funds from operations during that period. This metric indicates how much of a company’s profit is not covered by free cash flow.
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings would suggest. While it is not a problem to have a positive accrual ratio that indicates some level of non-cash profits, a high accrual ratio is arguably a bad thing because it indicates that there is no cash flow to match accounting profits. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accruals tend to be less profitable in the future.”
For the twelve months to June 2024, Fiverr International posted an accrual ratio of -0.26. This means that its free cash flow significantly exceeded its statutory profit. The company generated free cash flow of US$92 million during the period, dwarfing its reported profit of US$11.8 million. Fiverr International shareholders are no doubt pleased to see that free cash flow has improved over the past twelve months.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.
Our assessment of Fiverr International’s profit development
Fortunately for shareholders, Fiverr International generated plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we think it’s possible that Fiverr International’s statutory profit actually understates its earnings potential! And one can definitely take a positive view of the fact that it made a profit this year despite losing money last year. Ultimately, it’s important to consider more than just the factors above if you want to properly understand the company. If you want to learn more about Fiverr International as a company, it’s important to be aware of all the risks it faces. Case in point: We discovered 1 warning sign for Fiverr International You should be aware.
This note has only examined a single factor that can shed light on the nature of Fiverr International’s profits. But there is always more to discover if you are able to focus on the small details. For example, many people consider a high return on equity to be an indication of a favorable business situation, while others like to “follow the money” and look for stocks that insiders are buying. Although this may require a little research, you may find free Collection of companies with high return on equity or this list of stocks with significant insider holdings may prove useful.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
