Investors Can Find Comfort In Centrum Medyczne ENEL-MED's (WSE:ENE) Earnings Quality

Shareholders appeared unconcerned with Centrum Medyczne ENEL-MED S.A.'s (WSE:ENE) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

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A Closer Look At Centrum Medyczne ENEL-MED's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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".

Centrum Medyczne ENEL-MED has an accrual ratio of -0.27 for the year to September 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of zł53m, well over the zł10.4m it reported in profit. Centrum Medyczne ENEL-MED's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Centrum Medyczne ENEL-MED

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Centrum Medyczne ENEL-MED.

The Impact Of Unusual Items On Profit

Surprisingly, given Centrum Medyczne ENEL-MED's accrual ratio implied strong cash conversion, its paper profit was actually boosted by zł4.3m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Centrum Medyczne ENEL-MED's Profit Performance

In conclusion, Centrum Medyczne ENEL-MED's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Considering all the aforementioned, we'd venture that Centrum Medyczne ENEL-MED's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Centrum Medyczne ENEL-MED has 2 warning signs and it would be unwise to ignore these bad boys.

Our examination of Centrum Medyczne ENEL-MED has focussed on certain factors that can make its earnings look better than they are. 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.