Heidelberger Druckmaschinen's (ETR:HDD) Solid Profits Have Weak Fundamentals

Heidelberger Druckmaschinen Aktiengesellschaft (ETR:HDD) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

See our latest analysis for Heidelberger Druckmaschinen

Examining Cashflow Against Heidelberger Druckmaschinen's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2024, Heidelberger Druckmaschinen had an accrual ratio of 0.25. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of €15m despite its profit of €115.0m, mentioned above. We also note that Heidelberger Druckmaschinen's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of €15m. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Heidelberger Druckmaschinen's profit was boosted by unusual items worth €28m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Heidelberger Druckmaschinen doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Heidelberger Druckmaschinen's Profit Performance

Heidelberger Druckmaschinen had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Heidelberger Druckmaschinen's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Heidelberger Druckmaschinen as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Heidelberger Druckmaschinen and we think they deserve your attention.

Our examination of Heidelberger Druckmaschinen has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.