Veidekke's (OB:VEI) Conservative Accounting Might Explain Soft Earnings

The market was pleased with the recent earnings report from Veidekke ASA (OB:VEI), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.

Check out our latest analysis for Veidekke

Examining Cashflow Against Veidekke's 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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2023, Veidekke recorded an accrual ratio of -3.09. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr2.3b during the period, dwarfing its reported profit of kr1.07b. Veidekke shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Veidekke's Profit Performance

Happily for shareholders, Veidekke produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Veidekke's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 27% annually, 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. If you'd like to know more about Veidekke as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Veidekke has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Veidekke's 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.