Canada’s biggest bookstore posted record revenues last year, according to an analysis of its most recent financial returns. Indigo Books and Music Inc. took in over $1 billion (CAD) in sales for the first time since 2011, and increased its revenue from the previous year by about 2.5%.

Although the returns seem promising on the surface, Dalhousie Professor of Finance Dr. Greg Hebb points out that financial results can’t be properly analyzed in a vacuum.

“Whenever you look at financial statements, it’s always relative. It’s hard to just say, ‘that’s good, that’s bad,’” said Hebb. “If you’re analyzing Indigo, you might want to look at… some other comparable company… and how it is compared to that.”

In Indigo’s press release for the annual financial returns, CEO Heather Reisman did exactly that.

“We are delighted to report our highest revenues ever in what was a tough year for many retailers,” she said.

Indigo by mckied on TradingView.com

Indigo has seen its stock prices decline since June.

In an analyst and investor conference call the day after Indigo’s press release, Reisman elaborated on the company’s success.

“We’re very pleased to report earnings growth, along with the fourteenth straight quarter of year-over-year sales growth,” she said.

It is true that Indigo increased their revenue and earnings before income taxes compared to the previous year. However, Hebb says those factors are not the best way to determine the financial state of a company.

“One thing to keep in mind here, accountants created this. And accountants have very unique specific rules on how they create this,” Hebb said, referring to the earnings sections of the financial returns. “It’s not how you and would generally think. For instance, you and I go out, we have money in our pocket to buy what we want to buy. That’s not really what this is showing. This may show they made $20 mil, but they may have no cash.”

Therefore, according to Hebb, the statement of cash flows is the most important in determining a company’s profitability.

“[The statement of cash flows] basically takes that accounting statement and says, ‘ok, how does that convert into actual cash coming in and cash coming out?’ Because at the end of the day that’s what you care about: do you have cash? Employees don’t get paid with net income. Net income is some number at the bottom of a sheet. They get paid with cash.”

Indigo made over $35 million (CAD) in cash flow from their operating activities, which essentially means their day-to-day business. That amount was actually a decrease of about 8% from the previous fiscal year, when that same number was upwards of $38 million (CAD).

That decrease seems bad, but as Hebb said, context is important in judging financial returns. When compared to Barnes and Noble, the largest bookstore chain in the United States, that 8% dip is negligible. Barnes and Noble is a much bigger company than Indigo, and its cash flow from operating activities was over $145 million (USD) last year, according to the NASDAQ stock market website. However, that represents a decrease in cash flow of over 25% from their previous year of almost $200 million (USD). Barnes and Noble is one of the struggling retailers that Reisman was referring to in her statement for the press release.

Comparison of Indigo and Barnes and Noble’s net cash flow by year (millions of USD)

In the aforementioned conference call, Reisman also noted a few other factors that made this year’s financial returns unique. One of them was the presence of a new book from the Harry Potter series, the play Harry Potter and the Cursed Child.

“There’s nothing like a Harry Potter book that we can see on the horizon,” she said of her projections for the upcoming year.

The other factor was the decline of the adult colouring book phenomenon. Adult colouring books had been a solid source of revenue for Indigo, but Reisman said the craze “is just about petered out.”