The Strong Earnings Posted By Vitreous Glass (CVE:VCI) Are A Good Indication Of The Strength Of The Business

Vitreous Glass Inc. (CVE:VCI) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Vitreous Glass

A Closer Look At Vitreous Glass' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2020, Vitreous Glass had an accrual ratio of -0.42. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CA$3.7m during the period, dwarfing its reported profit of CA$2.70m. Vitreous Glass' free cash flow improved over the last year, which is generally good to see.

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

Our Take On Vitreous Glass' Profit Performance

As we discussed above, Vitreous Glass' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Vitreous Glass' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 29% annually, 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Vitreous Glass you should know about.

This note has only looked at a single factor that sheds light on the nature of Vitreous Glass' 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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This article by Simply Wall St is general in nature. 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.
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