Investors Shouldn't Be Too Comfortable With BBI Bürgerliches Brauhaus Immobilien's (FRA:BBI) Earnings

Despite posting some strong earnings, the market for BBI Bürgerliches Brauhaus Immobilien AG's (FRA:BBI) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for BBI Bürgerliches Brauhaus Immobilien

Zooming In On BBI Bürgerliches Brauhaus Immobilien'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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

BBI Bürgerliches Brauhaus Immobilien has an accrual ratio of 0.82 for the year to December 2023. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. To wit, it produced free cash flow of €5.3m during the period, falling well short of its reported profit of €83.6m. BBI Bürgerliches Brauhaus Immobilien's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits. The good news for shareholders is that BBI Bürgerliches Brauhaus Immobilien's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of BBI Bürgerliches Brauhaus Immobilien.

Our Take On BBI Bürgerliches Brauhaus Immobilien's Profit Performance

As we discussed above, we think BBI Bürgerliches Brauhaus Immobilien's 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 BBI Bürgerliches Brauhaus Immobilien's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you want to do dive deeper into BBI Bürgerliches Brauhaus Immobilien, you'd also look into what risks it is currently facing. Case in point: We've spotted 4 warning signs for BBI Bürgerliches Brauhaus Immobilien you should be mindful of and 1 of them is a bit unpleasant.

This note has only looked at a single factor that sheds light on the nature of BBI Bürgerliches Brauhaus Immobilien's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.