Brioschi Sviluppo Immobiliare's (BIT:BRI) Strong Earnings Are Of Good Quality

Investors were underwhelmed by the solid earnings posted by Brioschi Sviluppo Immobiliare S.p.A. (BIT:BRI) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Brioschi Sviluppo Immobiliare

A Closer Look At Brioschi Sviluppo Immobiliare'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 December 2022, Brioschi Sviluppo Immobiliare recorded an accrual ratio of -0.77. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of €174m, well over the €30.5m it reported in profit. Notably, Brioschi Sviluppo Immobiliare had negative free cash flow last year, so the €174m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Brioschi Sviluppo Immobiliare.

Our Take On Brioschi Sviluppo Immobiliare's Profit Performance

Happily for shareholders, Brioschi Sviluppo Immobiliare produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Brioschi Sviluppo Immobiliare'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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Brioschi Sviluppo Immobiliare at this point in time. At Simply Wall St, we found 1 warning sign for Brioschi Sviluppo Immobiliare and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Brioschi Sviluppo Immobiliare'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. 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 that insiders are buying 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.