EDAG Engineering Group's (ETR:ED4) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with EDAG Engineering Group AG's (ETR:ED4) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for EDAG Engineering Group

Examining Cashflow Against EDAG Engineering Group'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.

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.

EDAG Engineering Group has an accrual ratio of -0.10 for the year to June 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of €48m during the period, dwarfing its reported profit of €25.4m. Given that EDAG Engineering Group had negative free cash flow in the prior corresponding period, the trailing twelve month resul of €48m would seem to be a step in the right direction.

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 EDAG Engineering Group's Profit Performance

As we discussed above, EDAG Engineering Group has perfectly satisfactory free cash flow relative to profit. Because of this, we think EDAG Engineering Group's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. 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 EDAG Engineering Group, you'd also look into what risks it is currently facing. While conducting our analysis, we found that EDAG Engineering Group has 2 warning signs and it would be unwise to ignore these bad boys.

This note has only looked at a single factor that sheds light on the nature of EDAG Engineering Group'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. 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 with significant insider holdings 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.