Solid Earnings Reflect Südwestdeutsche Salzwerke's (FRA:SSH) Strength As A Business

Even though Südwestdeutsche Salzwerke AG's (FRA:SSH) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Südwestdeutsche Salzwerke

A Closer Look At Südwestdeutsche Salzwerke's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

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. 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 2023, Südwestdeutsche Salzwerke had an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of €64m in the last year, which was a lot more than its statutory profit of €32.4m. Südwestdeutsche Salzwerke'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 Südwestdeutsche Salzwerke.

Our Take On Südwestdeutsche Salzwerke's Profit Performance

As we discussed above, Südwestdeutsche Salzwerke's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Südwestdeutsche Salzwerke's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Südwestdeutsche Salzwerke as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 2 warning signs for Südwestdeutsche Salzwerke and you'll want to know about them.

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