We Think Centrum Medyczne ENEL-MED's (WSE:ENE) Statutory Profit Might Understate Its Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Centrum Medyczne ENEL-MED's (WSE:ENE) statutory profits are a good guide to its underlying earnings.

We like the fact that Centrum Medyczne ENEL-MED made a profit of zł4.21m on its revenue of zł407.4m, in the last year.

View our latest analysis for Centrum Medyczne ENEL-MED

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. Today, we'll discuss Centrum Medyczne ENEL-MED's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Centrum Medyczne ENEL-MED.

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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 September 2020, Centrum Medyczne ENEL-MED had an accrual ratio of -0.63. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of zł76m during the period, dwarfing its reported profit of zł4.21m. Centrum Medyczne ENEL-MED's free cash flow improved over the last year, which is generally good to see.

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

Happily for shareholders, Centrum Medyczne ENEL-MED produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Centrum Medyczne ENEL-MED's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To help with this, we've discovered 2 warning signs (1 is concerning!) that you ought to be aware of before buying any shares in Centrum Medyczne ENEL-MED.

Today we've zoomed in on a single data point to better understand the nature of Centrum Medyczne ENEL-MED'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. 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.

If you decide to trade Centrum Medyczne ENEL-MED, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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 (at) simplywallst.com.