Stock Analysis

Robust Earnings May Not Tell The Whole Story For Elton International Trading (ATH:ELTON)

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ATSE:ELTON
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Despite posting some strong earnings, the market for Elton International Trading Company S.A.'s (ATH:ELTON) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Elton International Trading

earnings-and-revenue-history
ATSE:ELTON Earnings and Revenue History September 24th 2022

A Closer Look At Elton International Trading's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2022, Elton International Trading recorded an accrual ratio of 0.34. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of €15m despite its profit of €12.4m, mentioned above. We saw that FCF was €11m a year ago though, so Elton International Trading has at least been able to generate positive FCF in the past. One positive for Elton International Trading shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On Elton International Trading's Profit Performance

As we discussed above, we think Elton International Trading'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 Elton International Trading's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 4 warning signs for Elton International Trading (2 are potentially serious!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Elton International Trading'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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