Statutory Profit Doesn't Reflect How Good Il Sole 24 ORE's (BIT:S24) Earnings Are

When companies post strong earnings, the stock generally performs well, just like Il Sole 24 ORE S.p.A.'s (BIT:S24) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

See our latest analysis for Il Sole 24 ORE

Zooming In On Il Sole 24 ORE's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2024, Il Sole 24 ORE recorded an accrual ratio of -0.67. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of €19m in the last year, which was a lot more than its statutory profit of €5.55m. Il Sole 24 ORE's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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 Il Sole 24 ORE's Profit Performance

Happily for shareholders, Il Sole 24 ORE produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Il Sole 24 ORE's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for Il Sole 24 ORE and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Il Sole 24 ORE's 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.