Why ALPHA ADRIATIC d.d's (ZGSE:ULPL) Earnings Are Better Than They Seem

The stock was sluggish on the back of ALPHA ADRIATIC d.d.'s (ZGSE:ULPL) recent earnings report. Our analysis suggests that there are some reasons for hope that investors should be aware of.

Check out our latest analysis for ALPHA ADRIATIC d.d

A Closer Look At ALPHA ADRIATIC d.d'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.

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.

Over the twelve months to December 2020, ALPHA ADRIATIC d.d recorded an accrual ratio of -0.19. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of Kn177m in the last year, which was a lot more than its statutory profit of Kn100.0m. ALPHA ADRIATIC d.d'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 ALPHA ADRIATIC d.d.

Our Take On ALPHA ADRIATIC d.d's Profit Performance

As we discussed above, ALPHA ADRIATIC d.d's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that ALPHA ADRIATIC d.d's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Our analysis shows 3 warning signs for ALPHA ADRIATIC d.d (2 are a bit concerning!) and we strongly recommend you look at these before investing.

Today we've zoomed in on a single data point to better understand the nature of ALPHA ADRIATIC d.d's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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