Why Fluxys Belgium's (EBR:FLUX) Earnings Are Better Than They Seem

Fluxys Belgium SA's (EBR:FLUX) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

View our latest analysis for Fluxys Belgium

Examining Cashflow Against Fluxys Belgium'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Fluxys Belgium has an accrual ratio of -0.16 for the year to June 2022. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of €393m, well over the €78.3m it reported in profit. Fluxys Belgium shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fluxys Belgium.

Our Take On Fluxys Belgium's Profit Performance

Happily for shareholders, Fluxys Belgium produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Fluxys Belgium's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 27% per year over the last three years. 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. If you want to do dive deeper into Fluxys Belgium, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Fluxys Belgium, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Fluxys Belgium's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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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.