Weak Statutory Earnings May Not Tell The Whole Story For Saccheria F.lli Franceschetti (BIT:SAC)

The market wasn't impressed with the soft earnings from Saccheria F.lli Franceschetti S.p.A. (BIT:SAC) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

See our latest analysis for Saccheria F.lli Franceschetti

Examining Cashflow Against Saccheria F.lli Franceschetti'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. 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.

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.

Saccheria F.lli Franceschetti has an accrual ratio of 172.04 for the year to June 2024. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of €1.9b despite its profit of €965.5k, mentioned above. We saw that FCF was €4.7m a year ago though, so Saccheria F.lli Franceschetti has at least been able to generate positive FCF in the past. The good news for shareholders is that Saccheria F.lli Franceschetti's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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 Saccheria F.lli Franceschetti's Profit Performance

As we have made quite clear, we're a bit worried that Saccheria F.lli Franceschetti didn't back up the last year's profit with free cashflow. For this reason, we think that Saccheria F.lli Franceschetti's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. 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 Saccheria F.lli Franceschetti (of which 1 is concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Saccheria F.lli Franceschetti's profit. But there are plenty of other ways to inform your opinion of a company. 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 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.