As the stock markets experience wild swings, investors may be turning to gambling at a casino instead. In fact, that may be just what is causing Rank Group (RNK LN), a leading UK based gaming company to report strong net income of £97.5M, the highest level in five years. Are these earnings sustainable? According to the StarMine Earnings Quality (EQ) model the earnings for RNK LN are coming from sustainable sources. On this metric, with an EQ score of 96, RNK LN ranks near the top relative to other companies in Europe. Let us examine some of the reasons.
In this chart, green indicates when free cash flow (FCF) exceeds net income. As you can see, free cash flow has exceeded net income during the last two years. But noteworthy is that in the most recent period, FCF was at its highest level in the last five years and also exceeded net income by a large margin. StarMine’s research has found that earnings backed by strong cash flows tend to be more sustainable than non-cash earnings.
Source: Thomson ONE / StarMine
Return on net operating assets measures a company’s operating efficiency. Our research has found that companies with high returns tend to have a higher probability of sustaining earnings in the future. Over the past year, the company’s return on net operating assets has risen significantly despite the rest of the industry experiencing a slump.
Source: Thomson ONE / StarMine
With increasing gross margins, net income at historical highs, and strong cash flows, it should come as no surprise that Rank Group has a high score on the EQ model. While a systematic approach to financial statement analysis certainly offers no promises, our EQ model is betting on this company to continue posting strong earnings in the near future.
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