Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Oyj Ahola Transport Abp (HEL:AHOLA).
While Oyj Ahola Transport Abp was able to generate revenue of €100.8m in the last twelve months, we think its profit result of €1.22m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Today, we’ll discuss Oyj Ahola Transport Abp’s free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Oyj Ahola Transport Abp.
Examining Cashflow Against Oyj Ahola Transport Abp’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. 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. 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.
Over the twelve months to December 2019, Oyj Ahola Transport Abp recorded an accrual ratio of -0.72. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of €7.4m, well over the €1.22m it reported in profit. Notably, Oyj Ahola Transport Abp had negative free cash flow last year, so the €7.4m it produced this year was a welcome improvement.
Our Take On Oyj Ahola Transport Abp’s Profit Performance
As we discussed above, Oyj Ahola Transport Abp’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Oyj Ahola Transport Abp’s statutory profit actually understates its earnings potential! And the EPS is up 51% annually, over the last three years. 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. In light of this, if you’d like to do more analysis on the company, it’s vital to be informed of the risks involved. For example, we’ve discovered 1 warning sign that you should run your eye over to get a better picture of Oyj Ahola Transport Abp.
Today we’ve zoomed in on a single data point to better understand the nature of Oyj Ahola Transport Abp’s profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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