Earnings Troubles May Signal Larger Issues for Odlewnie Polskie (WSE:ODL) Shareholders

The subdued market reaction suggests that Odlewnie Polskie S.A.'s (WSE:ODL) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

A Closer Look At Odlewnie Polskie's 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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.

Over the twelve months to December 2024, Odlewnie Polskie recorded an accrual ratio of 0.36. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Over the last year it actually had negative free cash flow of zł23m, in contrast to the aforementioned profit of zł13.2m. It's worth noting that Odlewnie Polskie generated positive FCF of zł37m a year ago, so at least they've done it in the past. One positive for Odlewnie Polskie 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Odlewnie Polskie.

Our Take On Odlewnie Polskie's Profit Performance

As we discussed above, we think Odlewnie Polskie's 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 Odlewnie Polskie's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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 Odlewnie Polskie as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 5 warning signs (1 makes us a bit uncomfortable!) that you ought to be aware of before buying any shares in Odlewnie Polskie.

This note has only looked at a single factor that sheds light on the nature of Odlewnie Polskie's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.