Rosenbauer International's (VIE:ROS) Conservative Accounting Might Explain Soft Earnings

By
Simply Wall St
Published
April 16, 2022
WBAG:ROS
Source: Shutterstock

Shareholders appeared unconcerned with Rosenbauer International AG's (VIE:ROS) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Rosenbauer International

earnings-and-revenue-history
WBAG:ROS Earnings and Revenue History April 16th 2022

Zooming In On Rosenbauer International's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Rosenbauer International has an accrual ratio of -0.21 for the year to December 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of €108m in the last year, which was a lot more than its statutory profit of €15.4m. Rosenbauer International shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Rosenbauer International's Profit Performance

Happily for shareholders, Rosenbauer International produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Rosenbauer International's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Rosenbauer International.

This note has only looked at a single factor that sheds light on the nature of Rosenbauer International'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. 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 that insiders are buying to be useful.

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