Are MFO Spólka Akcyjna's (WSE:MFO) Statutory Earnings A Good Reflection Of Its Earnings Potential?

By
Simply Wall St
Published
December 31, 2020

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing MFO Spólka Akcyjna (WSE:MFO).

We like the fact that MFO Spólka Akcyjna made a profit of zł20.3m on its revenue of zł423.4m, in the last year. The chart below shows that it has grown revenue over the last three years, while profit has remained roughly flat.

Check out our latest analysis for MFO Spólka Akcyjna

WSE:MFO Earnings and Revenue History December 31st 2020

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. So today we'll look at what MFO Spólka Akcyjna's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MFO Spólka Akcyjna.

Examining Cashflow Against MFO Spólka Akcyjna's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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'.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

MFO Spólka Akcyjna has an accrual ratio of -0.12 for the year to September 2020. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of zł42m during the period, dwarfing its reported profit of zł20.3m. MFO Spólka Akcyjna shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On MFO Spólka Akcyjna's Profit Performance

As we discussed above, MFO Spólka Akcyjna has perfectly satisfactory free cash flow relative to profit. Because of this, we think MFO Spólka Akcyjna's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about MFO Spólka Akcyjna as a business, it's important to be aware of any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of MFO Spólka Akcyjna.

This note has only looked at a single factor that sheds light on the nature of MFO Spólka Akcyjna's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.
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