There Are Some Holes In Skel fjárfestingafélag hf's (ICE:SKEL) Solid Earnings Release

Skel fjárfestingafélag hf. (ICE:SKEL) posted some decent earnings, but shareholders didn't react strongly. Our analysis has found some concerning factors which weaken the profit's foundation.

See our latest analysis for Skel fjárfestingafélag hf

Examining Cashflow Against Skel fjárfestingafélag hf'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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 2023, Skel fjárfestingafélag hf recorded an accrual ratio of 9.70. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of Kr1.2b despite its profit of Kr5.41b, mentioned above. We also note that Skel fjárfestingafélag hf's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of Kr1.2b. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Skel fjárfestingafélag hf.

How Do Unusual Items Influence Profit?

As it happens, there are a few different things to consider when we look at Skel fjárfestingafélag hf's profit and the last one we'll mention is Kr5.9b gain booked as unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Skel fjárfestingafélag hf had a rather significant contribution from unusual items relative to its profit to December 2023. 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 Skel fjárfestingafélag hf's Profit Performance

Skel fjárfestingafélag hf had a weak accrual ratio, but its profit did receive a boost from unusual items. On reflection, the above-mentioned factors give us the strong impression that Skel fjárfestingafélag hf'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you'd like to know more about Skel fjárfestingafélag hf as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with Skel fjárfestingafélag hf (including 3 which are significant).

Our examination of Skel fjárfestingafélag hf 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 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.