Bianor Holding AD's (BUL:BNR) Solid Earnings May Rest On Weak Foundations

The stock price didn't jump after Bianor Holding AD (BUL:BNR) posted decent earnings last week. We did some digging and believe investors may be worried about some underlying factors in the report.

See our latest analysis for Bianor Holding AD

Zooming In On Bianor Holding AD's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2021, Bianor Holding AD had an accrual ratio of 2.53. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of лв11.5m, a look at free cash flow indicates it actually burnt through лв1.4m in the last year. It's worth noting that Bianor Holding AD generated positive FCF of лв529k a year ago, so at least they've done it in the past. The good news for shareholders is that Bianor Holding AD's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Bianor Holding AD.

Our Take On Bianor Holding AD's Profit Performance

As we have made quite clear, we're a bit worried that Bianor Holding AD didn't back up the last year's profit with free cashflow. For this reason, we think that Bianor Holding AD's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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 Bianor Holding AD, you'd also look into what risks it is currently facing. For instance, we've identified 4 warning signs for Bianor Holding AD (3 make us uncomfortable) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Bianor Holding AD's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.