There May Be Reason For Hope In Athens Medical C.S.A's (ATH:IATR) Disappointing Earnings

Soft earnings didn't appear to concern Athens Medical C.S.A.'s (ATH:IATR) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Athens Medical C.S.A

A Closer Look At Athens Medical C.S.A'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Athens Medical C.S.A has an accrual ratio of -0.16 for the year to December 2020. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of €33m during the period, dwarfing its reported profit of €4.19m. Athens Medical C.S.A's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Athens Medical C.S.A.

Our Take On Athens Medical C.S.A's Profit Performance

As we discussed above, Athens Medical C.S.A has perfectly satisfactory free cash flow relative to profit. Because of this, we think Athens Medical C.S.A's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 58% annually, over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 2 warning signs we've spotted with Athens Medical C.S.A (including 1 which is a bit unpleasant).

Today we've zoomed in on a single data point to better understand the nature of Athens Medical C.S.A'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. 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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