Latest news with #KNOS
Yahoo
26-05-2025
- Business
- Yahoo
Kainos Group's (LON:KNOS) Soft Earnings Don't Show The Whole Picture
Kainos Group plc's (LON:KNOS) earnings announcement last week didn't impress shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement. Our free stock report includes 1 warning sign investors should be aware of before investing in Kainos Group. Read for free now. 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. This ratio tells us how much of a company's profit is not backed by free cashflow. That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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 December 2024, Kainos Group had an accrual ratio of -0.75. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of UK£57m, well over the UK£43.8m it reported in profit. Kainos Group did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. 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. Happily for shareholders, Kainos Group produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Kainos Group's statutory profit actually understates its earnings potential! And the EPS is up 13% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 1 warning sign for Kainos Group and you'll want to know about this. This note has only looked at a single factor that sheds light on the nature of Kainos Group's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Sign in to access your portfolio
Yahoo
07-04-2025
- Business
- Yahoo
Calculating The Intrinsic Value Of Kainos Group plc (LON:KNOS)
The projected fair value for Kainos Group is UK£6.65 based on 2 Stage Free Cash Flow to Equity With UK£6.20 share price, Kainos Group appears to be trading close to its estimated fair value The UK£10.30 analyst price target for KNOS is 55% more than our estimate of fair value Does the April share price for Kainos Group plc (LON:KNOS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example! Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (£, Millions) UK£43.9m UK£46.8m UK£55.6m UK£55.1m UK£55.2m UK£55.6m UK£56.3m UK£57.2m UK£58.2m UK£59.3m Growth Rate Estimate Source Analyst x5 Analyst x6 Analyst x6 Est @ -0.82% Est @ 0.12% Est @ 0.77% Est @ 1.23% Est @ 1.55% Est @ 1.78% Est @ 1.93% Present Value (£, Millions) Discounted @ 8.2% UK£40.6 UK£40.0 UK£43.9 UK£40.2 UK£37.2 UK£34.7 UK£32.4 UK£30.4 UK£28.6 UK£27.0 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = UK£355m The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.2%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = UK£59m× (1 + 2.3%) ÷ (8.2%– 2.3%) = UK£1.0b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£1.0b÷ ( 1 + 8.2%)10= UK£467m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£822m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of UK£6.2, the company appears about fair value at a 6.7% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Kainos Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.2%, which is based on a levered beta of 1.151. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. View our latest analysis for Kainos Group Strength Earnings growth over the past year exceeded the industry. Currently debt free. Dividends are covered by earnings and cash flows. Weakness Dividend is low compared to the top 25% of dividend payers in the IT market. Opportunity Annual revenue is forecast to grow faster than the British market. Good value based on P/E ratio and estimated fair value. Threat Annual earnings are forecast to grow slower than the British market. Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Kainos Group, there are three pertinent aspects you should consider: Risks: Case in point, we've spotted 1 warning sign for Kainos Group you should be aware of. Future Earnings: How does KNOS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart . Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered! PS. Simply Wall St updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
