Does ClearStar Inc’s (LON:CLSU) -47.31% Earnings Drop Reflect A Longer Term Trend?

by Ray Foley

 

When ClearStar Inc (AIM:CLSU) announced its most recent earnings (30 June 2017), I compared it against two factor: its historical earnings track record, and the performance of its industry peers on average. Being able to interpret how well ClearStar has done so far requires weighing its performance against a benchmark, rather than looking at a standalone number at a point in time. In this article, I’ve summarized the key takeaways on how I see CLSU has performed.

 

Was CLSU’s recent earnings decline indicative of a tough track record?

 

I like to use the ‘latest twelve-month’ data, which either annualizes the most recent 6-month earnings update, or in some cases, the most recent annual report is already the latest available financial data. This method allows me to analyze various companies in a uniform manner using the latest information. For ClearStar, its most recent bottom-line (trailing twelve month) is -US$2.19M, which, in comparison to the prior year’s figure, has become more negative. Since these figures may be relatively short-term thinking, I have created an annualized five-year figure for ClearStar’s net income, which stands at -US$1.39M. This doesn’t look much better, since earnings seem to have steadily been getting more and more negative over time.

 

We can further evaluate ClearStar’s loss by looking at what the industry has been experiencing over the past few years. Each year, for the last five years ClearStar’s top-line has grown by 19.77% on average, implying that the company is in a high-growth period with expenses shooting ahead of revenues, leading to annual losses. Viewing growth from a sector-level, the UK professional services industry has been growing, albeit, at a subdued single-digit rate of 3.78% in the previous year, and 9.69% over the last five years. This means that whatever near-term headwind the industry is facing, it’s hitting ClearStar harder than its peers.

 

What does this mean?

 

While past data is useful, it doesn’t tell the whole story. With companies that are currently loss-making, it is always hard to forecast what will happen in the future and when. The most insightful step is to assess company-specific issues ClearStar may be facing and whether management guidance has steadily been met in the past. I suggest you continue to research ClearStar to get a better picture of the stock