Burckhardt Compression Holding's (VTX:BCHN) Earnings Are Growing But Is There More To The Story?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Burckhardt Compression Holding (VTX:BCHN).

We like the fact that Burckhardt Compression Holding made a profit of CHF41.1m on its revenue of CHF648.6m, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for Burckhardt Compression Holding

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Burckhardt Compression Holding's cashflow tells us about the quality of its earnings. 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.

A Closer Look At Burckhardt Compression Holding'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. 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".

Over the twelve months to September 2020, Burckhardt Compression Holding recorded an accrual ratio of -0.10. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CHF80m during the period, dwarfing its reported profit of CHF41.1m. Notably, Burckhardt Compression Holding had negative free cash flow last year, so the CHF80m it produced this year was a welcome improvement.

Our Take On Burckhardt Compression Holding's Profit Performance

As we discussed above, Burckhardt Compression Holding has perfectly satisfactory free cash flow relative to profit. Because of this, we think Burckhardt Compression Holding's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 36% annually, over the last three years. 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 Burckhardt Compression Holding, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Burckhardt Compression Holding you should know about.

This note has only looked at a single factor that sheds light on the nature of Burckhardt Compression Holding's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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