LEWAG Holding (FRA:KGR) Is Posting Promising Earnings But The Good News Doesn’t Stop There

LEWAG Holding Aktiengesellschaft (FRA:KGR) announced a healthy earnings result recently, and the market rewarded it with a strong stock price reaction. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

See our latest analysis for LEWAG Holding

A Closer Look At LEWAG Holding's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

LEWAG Holding has an accrual ratio of -0.13 for the year to December 2021. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of €8.7m during the period, dwarfing its reported profit of €2.76m. Notably, LEWAG Holding had negative free cash flow last year, so the €8.7m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of LEWAG Holding.

Our Take On LEWAG Holding's Profit Performance

LEWAG Holding's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think LEWAG Holding's earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 2 warning signs for LEWAG Holding (of which 1 is potentially serious!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of LEWAG Holding's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying 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.