Investors Can Find Comfort In Lassila & Tikanoja Oyj's (HEL:LAT1V) Earnings Quality

The market was pleased with the recent earnings report from Lassila & Tikanoja Oyj (HEL:LAT1V), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

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A Closer Look At Lassila & Tikanoja Oyj'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. 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Lassila & Tikanoja Oyj has an accrual ratio of -0.18 for the year to March 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of €55m during the period, dwarfing its reported profit of €2.50m. Lassila & Tikanoja Oyj shareholders are no doubt pleased that free cash flow improved over the last twelve months. 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.

See our latest analysis for Lassila & Tikanoja Oyj

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

Lassila & Tikanoja Oyj's profit was reduced by unusual items worth €22m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Lassila & Tikanoja Oyj took a rather significant hit from unusual items in the year to March 2025. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Lassila & Tikanoja Oyj's Profit Performance

Considering both Lassila & Tikanoja Oyj's accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. Based on these factors, we think Lassila & Tikanoja Oyj's underlying earnings potential is as good as, or probably even better, than the statutory profit makes it seem! So while earnings quality is important, it's equally important to consider the risks facing Lassila & Tikanoja Oyj at this point in time. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Lassila & Tikanoja Oyj.

Our examination of Lassila & Tikanoja Oyj has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.