Impressive Earnings May Not Tell The Whole Story For Edil San Felice (BIT:ESF)

Despite announcing strong earnings, Edil San Felice S.p.A.'s (BIT:ESF) stock was sluggish. We did some digging and found some worrying underlying problems.

See our latest analysis for Edil San Felice

Zooming In On Edil San Felice'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Edil San Felice has an accrual ratio of 0.87 for the year to December 2023. 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. Even though it reported a profit of €8.51m, a look at free cash flow indicates it actually burnt through €6.1m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of €6.1m, this year, indicates high risk.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Edil San Felice's Profit Performance

As we discussed above, we think Edil San Felice'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 Edil San Felice's underlying earnings power is lower than its statutory profit. 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. 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. Every company has risks, and we've spotted 3 warning signs for Edil San Felice (of which 1 is potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Edil San Felice'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.