We Think You Should Be Aware Of Some Concerning Factors In ULMA Construccion Polska's (WSE:ULM) Earnings

The recent earnings posted by ULMA Construccion Polska S.A. (WSE:ULM) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for ULMA Construccion Polska

Zooming In On ULMA Construccion Polska'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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".

Over the twelve months to September 2024, ULMA Construccion Polska recorded an accrual ratio of 0.21. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of zł46m despite its profit of zł20.5m, mentioned above. We saw that FCF was zł28m a year ago though, so ULMA Construccion Polska has at least been able to generate positive FCF in the past. One positive for ULMA Construccion Polska shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On ULMA Construccion Polska's Profit Performance

ULMA Construccion Polska didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that ULMA Construccion Polska's true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 8.8% in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into ULMA Construccion Polska, you'd also look into what risks it is currently facing. Be aware that ULMA Construccion Polska is showing 4 warning signs in our investment analysis and 2 of those are a bit unpleasant...

Today we've zoomed in on a single data point to better understand the nature of ULMA Construccion Polska'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. 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.