Shareholders Will Be Pleased With The Quality of Zwack Unicum Nyrt's (BUSE:ZWACK) Earnings

The subdued stock price reaction suggests that Zwack Unicum Nyrt.'s (BUSE:ZWACK) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for Zwack Unicum Nyrt

A Closer Look At Zwack Unicum Nyrt's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Zwack Unicum Nyrt has an accrual ratio of -0.17 for the year to June 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of Ft2.7b, well over the Ft2.04b it reported in profit. Zwack Unicum Nyrt'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 Zwack Unicum Nyrt.

Our Take On Zwack Unicum Nyrt's Profit Performance

As we discussed above, Zwack Unicum Nyrt's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Zwack Unicum Nyrt's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To that end, you should learn about the 2 warning signs we've spotted with Zwack Unicum Nyrt (including 1 which is potentially serious).

This note has only looked at a single factor that sheds light on the nature of Zwack Unicum Nyrt'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. 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.

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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.
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