ACS Actividades de Construcción y Servicios (BME:ACS) Strong Profits May Be Masking Some Underlying Issues

ACS, Actividades de Construcción y Servicios, S.A. (BME:ACS) just released a solid earnings report, and the stock displayed some strength. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

We've discovered 3 warning signs about ACS Actividades de Construcción y Servicios. View them for free.

Zooming In On ACS Actividades de Construcción y Servicios' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

ACS Actividades de Construcción y Servicios has an accrual ratio of -0.11 for the year to March 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of €1.7b during the period, dwarfing its reported profit of €841.6m. ACS Actividades de Construcción y Servicios' free cash flow improved over the last year, which is generally good to see. 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.

View our latest analysis for ACS Actividades de Construcción y Servicios

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.

How Do Unusual Items Influence Profit?

Surprisingly, given ACS Actividades de Construcción y Servicios' accrual ratio implied strong cash conversion, its paper profit was actually boosted by €516m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. ACS Actividades de Construcción y Servicios had a rather significant contribution from unusual items relative to its profit to March 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On ACS Actividades de Construcción y Servicios' Profit Performance

In conclusion, ACS Actividades de Construcción y Servicios' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Having considered these factors, we don't think ACS Actividades de Construcción y Servicios' statutory profits give an overly harsh view of the business. So while earnings quality is important, it's equally important to consider the risks facing ACS Actividades de Construcción y Servicios at this point in time. When we did our research, we found 3 warning signs for ACS Actividades de Construcción y Servicios (1 is a bit unpleasant!) that we believe deserve your full attention.

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 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.