AT & S Austria Technologie & Systemtechnik's (VIE:ATS) Solid Profits Have Weak Fundamentals

Last week's profit announcement from AT & S Austria Technologie & Systemtechnik Aktiengesellschaft (VIE:ATS) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

Check out our latest analysis for AT & S Austria Technologie & Systemtechnik

Zooming In On AT & S Austria Technologie & Systemtechnik'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2021, AT & S Austria Technologie & Systemtechnik recorded an accrual ratio of 0.26. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of €253m, in contrast to the aforementioned profit of €39.1m. We also note that AT & S Austria Technologie & Systemtechnik's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of €253m.

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 AT & S Austria Technologie & Systemtechnik's Profit Performance

AT & S Austria Technologie & Systemtechnik didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that AT & S Austria Technologie & Systemtechnik's true underlying earnings power is actually less than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into AT & S Austria Technologie & Systemtechnik, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with AT & S Austria Technologie & Systemtechnik (including 2 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of AT & S Austria Technologie & Systemtechnik'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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