We Think Verkkokauppa.com Oyj's (HEL:VERK) Solid Earnings Are Understated

Verkkokauppa.com Oyj's (HEL:VERK) solid earnings announcement recently didn't do much to the stock price. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

Check out our latest analysis for Verkkokauppa.com Oyj

A Closer Look At Verkkokauppa.com Oyj'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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2023, Verkkokauppa.com Oyj recorded an accrual ratio of -0.67. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of €18m in the last year, which was a lot more than its statutory profit of €2.07m. Notably, Verkkokauppa.com Oyj had negative free cash flow last year, so the €18m it produced this year was a welcome improvement.

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 Verkkokauppa.com Oyj's Profit Performance

Happily for shareholders, Verkkokauppa.com Oyj produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Verkkokauppa.com Oyj's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the 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. If you'd like to know more about Verkkokauppa.com Oyj as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Verkkokauppa.com Oyj, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Verkkokauppa.com Oyj's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.