We Think You Can Look Beyond Koninklijke BAM Groep's (AMS:BAMNB) Lackluster Earnings

Soft earnings didn't appear to concern Koninklijke BAM Groep nv's (AMS:BAMNB) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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A Closer Look At Koninklijke BAM Groep's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Koninklijke BAM Groep has an accrual ratio of -0.17 for the year to June 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of €197m during the period, dwarfing its reported profit of €108.8m. Notably, Koninklijke BAM Groep had negative free cash flow last year, so the €197m it produced this year was a welcome improvement.

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 Koninklijke BAM Groep's Profit Performance

As we discussed above, Koninklijke BAM Groep's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Koninklijke BAM Groep's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 36% per year over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Koninklijke BAM Groep at this point in time. In terms of investment risks, we've identified 2 warning signs with Koninklijke BAM Groep, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Koninklijke BAM Groep'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 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.