We Think That There Are More Issues For Forbuild (WSE:FRB) Than Just Sluggish Earnings

The market shrugged off Forbuild SA's (WSE:FRB) weak earnings report last week. We looked at the details, and we think that investors may be responding to some encouraging factors.

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Zooming In On Forbuild'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. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2025, Forbuild had an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of zł11m during the period, dwarfing its reported profit of zł4.85m. Forbuild's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

View our latest analysis for Forbuild

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Forbuild.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Forbuild's profit was boosted by unusual items worth zł703k in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Forbuild doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Forbuild's Profit Performance

Forbuild's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if Forbuild's profits are a reasonable reflection of its underlying profitability. If you'd like to know more about Forbuild as a business, it's important to be aware of any risks it's facing. Be aware that Forbuild is showing 4 warning signs in our investment analysis and 2 of those don't sit too well with us...

Our examination of Forbuild has focussed on certain factors that can make its earnings look better than they are. 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 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.