Groupe MEDIA 6's (EPA:EDI) Performance Is Even Better Than Its Earnings Suggest

The subdued stock price reaction suggests that Groupe MEDIA 6's (EPA:EDI) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Groupe MEDIA 6

Zooming In On Groupe MEDIA 6'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Groupe MEDIA 6 had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of €7.3m during the period, dwarfing its reported profit of €3.13m. Given that Groupe MEDIA 6 had negative free cash flow in the prior corresponding period, the trailing twelve month resul of €7.3m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Groupe MEDIA 6.

Our Take On Groupe MEDIA 6's Profit Performance

As we discussed above, Groupe MEDIA 6 has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Groupe MEDIA 6's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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 Groupe MEDIA 6 as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Groupe MEDIA 6 you should know about.

This note has only looked at a single factor that sheds light on the nature of Groupe MEDIA 6's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com