ERG Spólka Akcyjna's (WSE:ERG) Earnings Offer More Than Meets The Eye

ERG Spólka Akcyjna's (WSE:ERG) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for ERG Spólka Akcyjna

A Closer Look At ERG Spólka Akcyjna'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2023, ERG Spólka Akcyjna had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of zł12m during the period, dwarfing its reported profit of zł4.89m. Notably, ERG Spólka Akcyjna had negative free cash flow last year, so the zł12m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of ERG Spólka Akcyjna.

Our Take On ERG Spólka Akcyjna's Profit Performance

As we discussed above, ERG Spólka Akcyjna has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that ERG Spólka Akcyjna's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 ERG Spólka Akcyjna, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for ERG Spólka Akcyjna and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of ERG Spólka Akcyjna's profit. 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 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.