AC Spólka Akcyjna's (WSE:ACG) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with AC Spólka Akcyjna's (WSE:ACG) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for AC Spólka Akcyjna

Examining Cashflow Against AC Spólka Akcyjna'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

AC Spólka Akcyjna has an accrual ratio of -0.26 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of zł68m, well over the zł30.7m it reported in profit. AC Spólka Akcyjna's 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 AC Spólka Akcyjna.

Our Take On AC Spólka Akcyjna's Profit Performance

As we discussed above, AC Spólka Akcyjna's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think AC Spólka Akcyjna's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 23% annually, 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. If you'd like to know more about AC Spólka Akcyjna as a business, it's important to be aware of any risks it's facing. Be aware that AC Spólka Akcyjna is showing 3 warning signs in our investment analysis and 1 of those is a bit unpleasant...

This note has only looked at a single factor that sheds light on the nature of AC Spólka Akcyjna's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.