We Think Ekopol Górnoslaski Holding's (WSE:EGH) Robust Earnings Are Conservative

Even though Ekopol Górnoslaski Holding S.A.'s (WSE:EGH) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

View our latest analysis for Ekopol Górnoslaski Holding

A Closer Look At Ekopol Górnoslaski Holding's 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). 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2021, Ekopol Górnoslaski Holding had an accrual ratio of -0.62. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of zł9.1m during the period, dwarfing its reported profit of zł4.76m. Ekopol Górnoslaski Holding'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 Ekopol Górnoslaski Holding.

Our Take On Ekopol Górnoslaski Holding's Profit Performance

As we discussed above, Ekopol Górnoslaski Holding's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Ekopol Górnoslaski Holding's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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 want to do dive deeper into Ekopol Górnoslaski Holding, you'd also look into what risks it is currently facing. Be aware that Ekopol Górnoslaski Holding is showing 2 warning signs in our investment analysis and 1 of those is a bit concerning...

Today we've zoomed in on a single data point to better understand the nature of Ekopol Górnoslaski Holding'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. 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.

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.

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