DB Energy S.A. (WSE:DBE) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
Check out our latest analysis for DB Energy
Zooming In On DB Energy'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. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
For the year to June 2022, DB Energy had an accrual ratio of 1.03. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of zł21m despite its profit of zł8.23m, mentioned above. It's worth noting that DB Energy generated positive FCF of zł728k a year ago, so at least they've done it in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of DB Energy.
Our Take On DB Energy's Profit Performance
As we discussed above, we think DB Energy's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that DB Energy's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into DB Energy, you'd also look into what risks it is currently facing. Our analysis shows 4 warning signs for DB Energy (3 are concerning!) and we strongly recommend you look at these bad boys before investing.
This note has only looked at a single factor that sheds light on the nature of DB Energy's profit. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.
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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.
About WSE:DBE
Low and slightly overvalued.
