Elvalhalcor Hellenic Copper and Aluminium Industry's (ATH:ELHA) Conservative Accounting Might Explain Soft Earnings

Investors were disappointed with the weak earnings posted by Elvalhalcor Hellenic Copper and Aluminium Industry S.A. (ATH:ELHA ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

See our latest analysis for Elvalhalcor Hellenic Copper and Aluminium Industry

Examining Cashflow Against Elvalhalcor Hellenic Copper and Aluminium Industry'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Elvalhalcor Hellenic Copper and Aluminium Industry has an accrual ratio of -0.13 for the year to December 2023. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of €270m, well over the €28.5m it reported in profit. Notably, Elvalhalcor Hellenic Copper and Aluminium Industry had negative free cash flow last year, so the €270m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Elvalhalcor Hellenic Copper and Aluminium Industry.

Our Take On Elvalhalcor Hellenic Copper and Aluminium Industry's Profit Performance

As we discussed above, Elvalhalcor Hellenic Copper and Aluminium Industry has perfectly satisfactory free cash flow relative to profit. Because of this, we think Elvalhalcor Hellenic Copper and Aluminium Industry's earnings potential is at least as good as it seems, and maybe even better! And it's also good to see that its earnings per share have improved a bit over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Elvalhalcor Hellenic Copper and Aluminium Industry as a business, it's important to be aware of any risks it's facing. For example, Elvalhalcor Hellenic Copper and Aluminium Industry has 4 warning signs (and 1 which is significant) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Elvalhalcor Hellenic Copper and Aluminium Industry'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 that insiders are buying 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.