Solid Earnings May Not Tell The Whole Story For Azienda Bresciana Petroli Nocivelli (BIT:ABP)

The recent earnings posted by Azienda Bresciana Petroli Nocivelli S.p.A. (BIT:ABP) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Azienda Bresciana Petroli Nocivelli

A Closer Look At Azienda Bresciana Petroli Nocivelli's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Azienda Bresciana Petroli Nocivelli has an accrual ratio of 0.37 for the year to December 2023. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. Indeed, in the last twelve months it reported free cash flow of €5.5m, which is significantly less than its profit of €11.1m. Azienda Bresciana Petroli Nocivelli shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for Azienda Bresciana Petroli Nocivelli shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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.

Our Take On Azienda Bresciana Petroli Nocivelli's Profit Performance

As we discussed above, we think Azienda Bresciana Petroli Nocivelli's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Azienda Bresciana Petroli Nocivelli's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 6.2% in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - Azienda Bresciana Petroli Nocivelli has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Azienda Bresciana Petroli Nocivelli's profit. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This 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.