Bijou Brigitte modische Accessoires' (ETR:BIJ) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with Bijou Brigitte modische Accessoires Aktiengesellschaft's (ETR:BIJ) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Bijou Brigitte modische Accessoires

Zooming In On Bijou Brigitte modische Accessoires' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. 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.

For the year to December 2023, Bijou Brigitte modische Accessoires had an accrual ratio of -0.29. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of €60m during the period, dwarfing its reported profit of €24.1m. Bijou Brigitte modische Accessoires' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Bijou Brigitte modische Accessoires.

Our Take On Bijou Brigitte modische Accessoires' Profit Performance

Happily for shareholders, Bijou Brigitte modische Accessoires produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Bijou Brigitte modische Accessoires' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the 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. You'd be interested to know, that we found 2 warning signs for Bijou Brigitte modische Accessoires and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Bijou Brigitte modische Accessoires' profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.