Installux's (EPA:ALLUX) Solid Earnings Have Been Accounted For Conservatively

Shareholders appeared to be happy with Installux S.A.'s (EPA:ALLUX) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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A Closer Look At Installux'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Installux has an accrual ratio of -0.11 for the year to December 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of €17m during the period, dwarfing its reported profit of €8.45m. Installux's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Installux.

Our Take On Installux's Profit Performance

As we discussed above, Installux has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Installux's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 30% in 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. 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. Case in point: We've spotted 2 warning signs for Installux you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Installux's profit. 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. 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.