Investors Shouldn't Be Too Comfortable With AS Latvijas Juras medicinas centrs' (MUN:UOM) Robust Earnings

Despite posting some strong earnings, the market for AS Latvijas Juras medicinas centrs' (MUN:UOM) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

View our latest analysis for AS Latvijas Juras medicinas centrs

Examining Cashflow Against AS Latvijas Juras medicinas centrs' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. 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 March 2022, AS Latvijas Juras medicinas centrs recorded an accrual ratio of 0.37. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of €740k despite its profit of €1.06m, mentioned above. We saw that FCF was €248k a year ago though, so AS Latvijas Juras medicinas centrs has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AS Latvijas Juras medicinas centrs.

Our Take On AS Latvijas Juras medicinas centrs' Profit Performance

As we discussed above, we think AS Latvijas Juras medicinas centrs' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that AS Latvijas Juras medicinas centrs' underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. 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 AS Latvijas Juras medicinas centrs (of which 1 can't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of AS Latvijas Juras medicinas centrs' 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. 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.