Société Financière des Caoutchoucs' (BDL:SOFIN) Performance Is Even Better Than Its Earnings Suggest

Even though Société Financière des Caoutchoucs S.A.'s (BDL:SOFIN) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Société Financière des Caoutchoucs

Examining Cashflow Against Société Financière des Caoutchoucs' 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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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.

Société Financière des Caoutchoucs has an accrual ratio of -0.13 for the year to December 2021. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of €176m during the period, dwarfing its reported profit of €80.4m. Société Financière des Caoutchoucs' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Société Financière des Caoutchoucs.

Our Take On Société Financière des Caoutchoucs' Profit Performance

As we discussed above, Société Financière des Caoutchoucs has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Société Financière des Caoutchoucs' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 1 warning sign for Société Financière des Caoutchoucs you should know about.

This note has only looked at a single factor that sheds light on the nature of Société Financière des Caoutchoucs' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.