We Think Mostostal Warszawa's (WSE:MSW) Profit Is Only A Baseline For What They Can Achieve

The subdued stock price reaction suggests that Mostostal Warszawa S.A.'s (WSE:MSW) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Mostostal Warszawa

Zooming In On Mostostal Warszawa'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

For the year to March 2024, Mostostal Warszawa had an accrual ratio of -1.51. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of zł148m during the period, dwarfing its reported profit of zł19.0m. Given that Mostostal Warszawa had negative free cash flow in the prior corresponding period, the trailing twelve month resul of zł148m would seem to be a step in the right direction. 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.

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

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Mostostal Warszawa's profit was boosted by unusual items worth zł1.9m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Mostostal Warszawa's Profit Performance

In conclusion, Mostostal Warszawa's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Considering all the aforementioned, we'd venture that Mostostal Warszawa's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Mostostal Warszawa as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 2 warning signs for Mostostal Warszawa and you'll want to know about these.

Our examination of Mostostal Warszawa 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. 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.