There May Be Underlying Issues With The Quality Of Brodogradiliste Viktor Lenac d.d's (ZGSE:VLEN) Earnings

Despite posting some strong earnings, the market for Brodogradiliste Viktor Lenac d.d.'s (ZGSE:VLEN) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Brodogradiliste Viktor Lenac d.d

Examining Cashflow Against Brodogradiliste Viktor Lenac d.d'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.

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. 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.

Brodogradiliste Viktor Lenac d.d has an accrual ratio of 0.24 for the year to September 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of €4.8m, in contrast to the aforementioned profit of €5.22m. We saw that FCF was €10m a year ago though, so Brodogradiliste Viktor Lenac d.d has at least been able to generate positive FCF in the past. One positive for Brodogradiliste Viktor Lenac d.d 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 Brodogradiliste Viktor Lenac d.d.

Our Take On Brodogradiliste Viktor Lenac d.d's Profit Performance

Brodogradiliste Viktor Lenac d.d'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 Brodogradiliste Viktor Lenac d.d's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate 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 want to do dive deeper into Brodogradiliste Viktor Lenac d.d, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Brodogradiliste Viktor Lenac d.d (of which 1 is a bit unpleasant!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Brodogradiliste Viktor Lenac d.d's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.