The Strong Earnings Posted By Nordic Lights Group Oyj (HEL:NORDLIG) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that Nordic Lights Group Oyj's (HEL:NORDLIG) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Nordic Lights Group Oyj

Examining Cashflow Against Nordic Lights Group Oyj's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. 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".

For the year to December 2022, Nordic Lights Group Oyj had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of €9.4m during the period, dwarfing its reported profit of €4.57m. Given that Nordic Lights Group Oyj had negative free cash flow in the prior corresponding period, the trailing twelve month resul of €9.4m 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 Nordic Lights Group Oyj's Profit Performance

As we discussed above, Nordic Lights Group Oyj has perfectly satisfactory free cash flow relative to profit. Because of this, we think Nordic Lights Group Oyj's earnings potential is at least as good as it seems, and maybe even better! Furthermore, it has done a great job growing EPS over the last year. 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'd like to know more about Nordic Lights Group Oyj as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Nordic Lights Group Oyj and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Nordic Lights Group Oyj'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.