Eurobio Scientific Société anonyme's (EPA:ALERS) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for Eurobio Scientific Société anonyme's (EPA:ALERS) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Eurobio Scientific Société anonyme

A Closer Look At Eurobio Scientific 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Eurobio Scientific Société anonyme has an accrual ratio of 0.37 for the year to December 2020. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of €53m in the last year, which was a lot less than its statutory profit of €73.5m. We note, however, that Eurobio Scientific Société anonyme grew its free cash flow over the last year. The good news for shareholders is that Eurobio Scientific Société anonyme's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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 Eurobio Scientific Société anonyme's Profit Performance

As we discussed above, we think Eurobio Scientific Société anonyme's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Eurobio Scientific Société anonyme's underlying earnings power is lower than its statutory profit. 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'd like to know more about Eurobio Scientific Société anonyme as a business, it's important to be aware of any risks it's facing. For example, Eurobio Scientific Société anonyme has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Eurobio Scientific Société anonyme'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 that insiders are buying to be useful.

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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. 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.
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