Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's (ETR:BVB) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for Borussia Dortmund GmbH & Co. Kommanditgesellschaft auf Aktien's (ETR:BVB) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

A Closer Look At Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 March 2024, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien recorded an accrual ratio of 0.47. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of €32.5m, a look at free cash flow indicates it actually burnt through €125m in the last year. We also note that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of €125m. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's profit suffered from unusual items, which reduced profit by €3.4m in the last twelve months. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Profit Performance

In conclusion, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, we think it's very unlikely that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's statutory profits make it seem much weaker than it is. If you want to do dive deeper into Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien you should be aware of.

Our examination of Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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 with significant insider holdings 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.