Investors Can Find Comfort In Nordwest Handel's (FRA:NWX) Earnings Quality

Shareholders appeared unconcerned with Nordwest Handel AG's (FRA:NWX) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Nordwest Handel

A Closer Look At Nordwest Handel'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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2020, Nordwest Handel recorded an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of €14m, well over the €6.82m it reported in profit. Nordwest Handel's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Nordwest Handel's Profit Performance

Nordwest Handel's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Nordwest Handel's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 28% per year over the last three years. 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 Nordwest Handel, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Nordwest Handel and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Nordwest Handel'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 that insiders are buying to be useful.

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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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