There Are Some Holes In PGF Polska Grupa Fotowoltaiczna's (WSE:PGV) Solid Earnings Release

Shareholders were pleased with the recent earnings report from PGF Polska Grupa Fotowoltaiczna SA (WSE:PGV). However, we think that investors should be cautious when interpreting the profit numbers.

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Examining Cashflow Against PGF Polska Grupa Fotowoltaiczna'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. 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. 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 September 2025, PGF Polska Grupa Fotowoltaiczna had an accrual ratio of 0.54. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of zł168k, in contrast to the aforementioned profit of zł65.3m. We also note that PGF Polska Grupa Fotowoltaiczna's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of zł168k. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part. The good news for shareholders is that PGF Polska Grupa Fotowoltaiczna's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

See our latest analysis for PGF Polska Grupa Fotowoltaiczna

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PGF Polska Grupa Fotowoltaiczna.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that PGF Polska Grupa Fotowoltaiczna's profit was boosted by unusual items worth zł57m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that PGF Polska Grupa Fotowoltaiczna's positive unusual items were quite significant relative to its profit in the year to September 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On PGF Polska Grupa Fotowoltaiczna's Profit Performance

PGF Polska Grupa Fotowoltaiczna had a weak accrual ratio, but its profit did receive a boost from unusual items. On reflection, the above-mentioned factors give us the strong impression that PGF Polska Grupa Fotowoltaiczna'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for PGF Polska Grupa Fotowoltaiczna (of which 2 can't be ignored!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.