Should You Rely On Europris's (OB:EPR) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Europris (OB:EPR).

It's good to see that over the last twelve months Europris made a profit of kr649.1m on revenue of kr7.39b. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Europris

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what Europris' cashflow tells us about the quality of its earnings. 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.

Examining Cashflow Against Europris' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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.

Europris has an accrual ratio of -0.30 for the year to September 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of kr1.5b in the last year, which was a lot more than its statutory profit of kr649.1m. Europris shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Europris' Profit Performance

Happily for shareholders, Europris produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Europris' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 65% per year 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 Europris as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Europris (including 1 which is concerning).

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