We Think That There Are Issues Underlying Econergy Renewable Energy's (TLV:ECNR) Earnings

Econergy Renewable Energy Ltd's (TLV:ECNR) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

View our latest analysis for Econergy Renewable Energy

Zooming In On Econergy Renewable Energy'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. 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.

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".

For the year to December 2022, Econergy Renewable Energy had an accrual ratio of 0.66. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of €2.37m, a look at free cash flow indicates it actually burnt through €58m in the last year. We also note that Econergy Renewable Energy's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of €58m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Econergy Renewable Energy.

Our Take On Econergy Renewable Energy's Profit Performance

As we discussed above, we think Econergy Renewable Energy's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Econergy Renewable Energy's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. So while earnings quality is important, it's equally important to consider the risks facing Econergy Renewable Energy at this point in time. At Simply Wall St, we found 2 warning signs for Econergy Renewable Energy and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Econergy Renewable Energy'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. 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.