Stock Analysis

Investors Shouldn't Be Too Comfortable With Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's (ETR:BVB) Earnings

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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 shareholders have noticed something concerning in the numbers.

View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

XTRA:BVB Earnings and Revenue History October 9th 2023

Zooming In On Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien'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). 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

Over the twelve months to June 2023, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien recorded an accrual ratio of 0.37. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of €93m despite its profit of €9.55m, mentioned above. 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 €93m. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

Unfortunately (in the short term) Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien saw its profit reduced by unusual items worth €3.4m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien to produce a higher profit next year, all else being equal.

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

Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Having considered these factors, we don't think Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's statutory profits give an overly harsh view of the business. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien has 1 warning sign and it would be unwise to ignore it.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.