Robust Earnings May Not Tell The Whole Story For Elinoil Hellenic Petroleum (ATH:ELIN)

Elinoil Hellenic Petroleum Company S.A.'s (ATH:ELIN) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

Check out our latest analysis for Elinoil Hellenic Petroleum

Zooming In On Elinoil Hellenic Petroleum's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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.

Elinoil Hellenic Petroleum has an accrual ratio of 0.25 for the year to June 2021. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of €35m, in contrast to the aforementioned profit of €2.67m. We also note that Elinoil Hellenic Petroleum's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of €35m.

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

Our Take On Elinoil Hellenic Petroleum's Profit Performance

Elinoil Hellenic Petroleum'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. Therefore, it seems possible to us that Elinoil Hellenic Petroleum's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 20% EPS growth in 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 Elinoil Hellenic Petroleum as a business, it's important to be aware of any risks it's facing. Our analysis shows 4 warning signs for Elinoil Hellenic Petroleum (3 can't be ignored!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Elinoil Hellenic Petroleum'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.

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