Alexanderwerk's (FRA:ALXA) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that Alexanderwerk Aktiengesellschaft's (FRA:ALXA) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

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A Closer Look At Alexanderwerk'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Alexanderwerk has an accrual ratio of 0.27 for the year to December 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of €4.70m, a look at free cash flow indicates it actually burnt through €680k in the last year. It's worth noting that Alexanderwerk generated positive FCF of €5.1m a year ago, so at least they've done it in the past.

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 Alexanderwerk's Profit Performance

Alexanderwerk didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Alexanderwerk's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Alexanderwerk, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with Alexanderwerk (including 1 which makes us a bit uncomfortable).

Today we've zoomed in on a single data point to better understand the nature of Alexanderwerk's 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 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.