When companies post strong earnings, the stock generally performs well, just like Westwing Group AG's (ETR:WEW) stock has recently. We did some digging and found some further encouraging factors that investors will like.
Examining Cashflow Against Westwing Group'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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 December 2020, Westwing Group recorded an accrual ratio of -3.77. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of €39m in the last year, which was a lot more than its statutory profit of €29.8m. Given that Westwing Group had negative free cash flow in the prior corresponding period, the trailing twelve month resul of €39m would seem to be a step in the right direction.
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.
Our Take On Westwing Group's Profit Performance
As we discussed above, Westwing Group's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Westwing Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, Westwing Group has 2 warning signs (and 1 which is concerning) we think you should know about.
Today we've zoomed in on a single data point to better understand the nature of Westwing Group's profit. 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.
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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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