Centrale del Latte d'Italia's (BIT:CLI) Performance Is Even Better Than Its Earnings Suggest

When companies post strong earnings, the stock generally performs well, just like Centrale del Latte d'Italia S.p.A.'s (BIT:CLI) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

Check out our latest analysis for Centrale del Latte d'Italia

Examining Cashflow Against Centrale del Latte d'Italia's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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 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. 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 June 2023, Centrale del Latte d'Italia recorded an accrual ratio of -0.17. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of €18m during the period, dwarfing its reported profit of €1.44m. Centrale del Latte d'Italia's free cash flow improved over the last year, which is generally good to see.

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 Centrale del Latte d'Italia's Profit Performance

Happily for shareholders, Centrale del Latte d'Italia produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Centrale del Latte d'Italia's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Centrale del Latte d'Italia (of which 2 are a bit concerning!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Centrale del Latte d'Italia'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.