We Believe That Casta Diva Group's (BIT:CDG) Weak Earnings Are A Good Indicator Of Underlying Profitability

The market shrugged off Casta Diva Group S.p.A.'s (BIT:CDG) weak earnings report. While shares were up, we believe there are some factors in the earnings report that might cause investors some concerns.

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Zooming In On Casta Diva Group'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Casta Diva Group has an accrual ratio of 0.29 for the year to December 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of €937.6k, a look at free cash flow indicates it actually burnt through €5.4m 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 €5.4m, this year, indicates high risk. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Casta Diva Group

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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Casta Diva Group's profit was boosted by unusual items worth €1.1m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Casta Diva Group doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Casta Diva Group's Profit Performance

Summing up, Casta Diva Group received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Casta Diva Group's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Casta Diva Group as a business, it's important to be aware of any risks it's facing. Our analysis shows 5 warning signs for Casta Diva Group (2 shouldn't be ignored!) and we strongly recommend you look at these before investing.

Our examination of Casta Diva Group has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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 with significant insider holdings 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.