We're Not So Sure You Should Rely on Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag's (BUSE:APPENINN) Statutory Earnings

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag (BUSE:APPENINN).

It's good to see that over the last twelve months Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag made a profit of €7.66m on revenue of €7.01m. One positive is that it has grown both its profit and its revenue, over the last few years, though not in the last twelve months.

View our latest analysis for Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Therefore, we think it's worth taking a closer look at Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag's cashflow, as well as examining the impact that unusual items have had on its reported profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag.

Examining Cashflow Against Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2020, Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag recorded an accrual ratio of 0.34. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of €40m despite its profit of €7.66m, mentioned above. We saw that FCF was €19m a year ago though, so Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag has at least been able to generate positive FCF in the past. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by €18m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag had a rather significant contribution from unusual items relative to its profit to June 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag's Profit Performance

Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag's profits probably give an overly generous impression of its sustainable level of profitability. 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. For instance, we've identified 4 warning signs for Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag (2 are potentially serious) you should be familiar with.

Our examination of Appeninn Vagyonkezelo Holding Nyilvanosan Mukodo Reszvenytarsasag has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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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