Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK (WSE:RMK) Is Growing Earnings But Are They A Good Guide?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK (WSE:RMK).

It's good to see that over the last twelve months Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK made a profit of zł16.7m on revenue of zł287.5m. Happily, it has grown both its profit and revenue over the last three years (though we note its revenue is down over the last year).

Check out our latest analysis for Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a result, today we're going to take a closer look at Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK's cashflow, and unusual items, with a view to understanding what these might tell us about its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK.

Zooming In On Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2020, Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK recorded an accrual ratio of -1.05. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of zł35m during the period, dwarfing its reported profit of zł16.7m. Notably, Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK had negative free cash flow last year, so the zł35m it produced this year was a welcome improvement. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK's profit was boosted by unusual items worth zł7.3m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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 Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK's positive unusual items were quite significant relative to its profit in the year to September 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK's Profit Performance

In conclusion, Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK's profits are a reasonable reflection of its underlying profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK has 2 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 that insiders are buying.

When trading Przedsiebiorstwo Modernizacji Urzadzen Energetycznych REMAK or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.