Lexibook - Linguistic Electronic System Société anonyme's (EPA:ALLEX) Earnings Are Of Questionable Quality

Lexibook - Linguistic Electronic System Société anonyme (EPA:ALLEX) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Lexibook - Linguistic Electronic System Société anonyme

Examining Cashflow Against Lexibook - Linguistic Electronic System Société anonyme'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Lexibook - Linguistic Electronic System Société anonyme has an accrual ratio of 0.25 for the year to September 2021. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of €3.08m, a look at free cash flow indicates it actually burnt through €847k in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of €847k, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lexibook - Linguistic Electronic System Société anonyme.

Our Take On Lexibook - Linguistic Electronic System Société anonyme's Profit Performance

Lexibook - Linguistic Electronic System Société anonyme's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Lexibook - Linguistic Electronic System Société anonyme's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high 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 want to do dive deeper into Lexibook - Linguistic Electronic System Société anonyme, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Lexibook - Linguistic Electronic System Société anonyme (2 are concerning) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Lexibook - Linguistic Electronic System Société anonyme'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.

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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.