CZG - Ceská zbrojovka Group's (SEP:CZG) Soft Earnings Are Actually Better Than They Appear

The market for CZG - Ceská zbrojovka Group SE's (SEP:CZG) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for CZG - Ceská zbrojovka Group

Zooming In On CZG - Ceská zbrojovka Group'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".

CZG - Ceská zbrojovka Group has an accrual ratio of -0.18 for the year to December 2020. 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 Kč1.5b, well over the Kč676.6m it reported in profit. CZG - Ceská zbrojovka Group shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 CZG - Ceská zbrojovka Group's Profit Performance

Happily for shareholders, CZG - Ceská zbrojovka Group produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that CZG - Ceská zbrojovka Group's statutory profit actually understates its earnings potential! And the EPS is up 32% 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 while earnings quality is important, it's equally important to consider the risks facing CZG - Ceská zbrojovka Group at this point in time. You'd be interested to know, that we found 1 warning sign for CZG - Ceská zbrojovka Group and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of CZG - Ceská zbrojovka Group'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. 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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