Italian Wine Brands' (BIT:IWB) Solid Earnings Are Supported By Other Strong Factors

The subdued stock price reaction suggests that Italian Wine Brands S.p.A.'s (BIT:IWB) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Italian Wine Brands

A Closer Look At Italian Wine Brands' 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 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".

Italian Wine Brands has an accrual ratio of -0.11 for the year to June 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of €57m during the period, dwarfing its reported profit of €20.7m. Italian Wine Brands' 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 Italian Wine Brands' Profit Performance

Italian Wine Brands' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Italian Wine Brands' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 24% per year over the last three years. 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. If you want to do dive deeper into Italian Wine Brands, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Italian Wine Brands has 2 warning signs and it would be unwise to ignore these.

This note has only looked at a single factor that sheds light on the nature of Italian Wine Brands' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.