Investors Shouldn't Be Too Comfortable With ViDiS' (WSE:VDS) Robust Earnings

Despite posting some strong earnings, the market for ViDiS S.A.'s (WSE:VDS) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for ViDiS

Examining Cashflow Against ViDiS' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

ViDiS has an accrual ratio of 0.74 for the year to December 2021. 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. Over the last year it actually had negative free cash flow of zł5.7m, in contrast to the aforementioned profit of zł4.32m. We saw that FCF was zł9.2m a year ago though, so ViDiS has at least been able to generate positive FCF in the past. One positive for ViDiS 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 ViDiS.

Our Take On ViDiS' Profit Performance

As we discussed above, we think ViDiS' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that ViDiS' underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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'd like to know more about ViDiS as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that ViDiS has 2 warning signs and it would be unwise to ignore them.

Today we've zoomed in on a single data point to better understand the nature of ViDiS' 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 that insiders are buying.

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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.