Should You Rely On Verallia Deutschland's (FRA:OLG) Earnings Growth?

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Verallia Deutschland's (FRA:OLG) statutory profits are a good guide to its underlying earnings.

While Verallia Deutschland was able to generate revenue of €578.7m in the last twelve months, we think its profit result of €62.3m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Verallia Deutschland

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a result, we think it's well worth considering what Verallia Deutschland's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Verallia Deutschland.

Zooming In On Verallia Deutschland's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2020, Verallia Deutschland recorded an accrual ratio of -0.15. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of €90m during the period, dwarfing its reported profit of €62.3m. Verallia Deutschland's free cash flow improved over the last year, which is generally good to see.

Our Take On Verallia Deutschland's Profit Performance

As we discussed above, Verallia Deutschland has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Verallia Deutschland's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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 Verallia Deutschland as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Verallia Deutschland you should know about.

Today we've zoomed in on a single data point to better understand the nature of Verallia Deutschland'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. 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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