AP/E ratio of 4 or 23? I'm not sure what to do with this ftse 250 stock

Today (March 7), Only group (LSE: Just), the Ftse 250 Financial Services Supplier published its results of 2024. And despite informing a great increase in profits, investors reacted badly.

Comparing 2024 with 2023, the results show a 34% increase in the underlying profits to £ 504 million, a 36% increase in retirement sales and an improvement in the return of capital. As a result, directors were able to announce a 20% increase in the dividend.

At first glance, actions seem to be a bargain. The underlying profits per action were 36p, which implies a price ratio (p/e) of only four.

In short, the group's executive director commented: “We made a promise three years ago to double the profits for five years. We have significantly exceeded that goal in just three years and we create a substantial value of shareholders as a result. “

So why did the company's shares fell so much today? At one point they fell 15% before recovering slightly.

Different standards

I suspect that it has something to do with the use of the group of alternative performance measures. These can produce different results to the legal ones used by the accountants, as established by the financial information standards.

A look at the company's accounts shows that the gain reported after taxes was £ 80 million. This was £ 49m (38%) lower than by 2023. and very different from its underlying profit of £ 504 million.

The basic profits per action by 2024 were 6.5p. Using this measure, the actions have a P/E relationship of around 23. Again, this is miles away from the title number.

To help investors understand the variation in these figures, reconciliation is provided.

Most of the difference is explained by the “Profit posting in CSM”(£ 369m), which is excluded from underlying profits. This refers to the contractual service margin reserve, a cube in which the profits are differentiated and informed at a later date.

Accounting standards require that the gain of new businesses be reflected during the useful life of the contract. On the contrary, when informing its main numbers, the company prefers to include everything at once.

Of course, there is nothing wrong with any of the approaches. Directors are not hiding anything, they are only choosing a different method to interpret their results.

What does all this mean?

In my opinion, this makes it difficult for investors to understand the numbers.

However, one thing that never lies is effective. It exists or does not. During 2024, the group reported a significant increase in cash generated from its operational activities. In general, cash balances increased by 54%.

In addition to this, in my opinion, there are other reasons to consider investing in the group. It is growing rapidly and the company describes market conditions as “buoyant“In addition, with a solvency capital coverage ratio of 204%, its balance remains robust.

But there are risks.

Annuities sales can slow down if interest rates fall as planned. And the group operates in a very competitive market that is sensitive to broader economic conditions. In addition, there are better income actions.

In general, I'm still undecided. Therefore, I will continue to monitor the company's performance, taking into account the alternative and legal measures, in the coming months, in order to review the investment case later in the year.