Soluzione Tasse's (BIT:STG) Earnings Are Weaker Than They Seem

Soluzione Tasse S.p.A. (BIT:STG) just reported some strong earnings, and the market rewarded them with a positive share price move. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

View our latest analysis for Soluzione Tasse

A Closer Look At Soluzione Tasse'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Soluzione Tasse has an accrual ratio of 1.60 for the year to December 2021. 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. Over the last year it actually had negative free cash flow of €4.5m, in contrast to the aforementioned profit of €1.25m. We saw that FCF was €761k a year ago though, so Soluzione Tasse has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Soluzione Tasse.

Our Take On Soluzione Tasse's Profit Performance

As we discussed above, we think Soluzione Tasse's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Soluzione Tasse's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 2 warning signs for Soluzione Tasse (1 is significant!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Soluzione Tasse'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.