Here's Why We Don't Think Grupa Azoty Zaklady Chemiczne Police's (WSE:PCE) Statutory Earnings Reflect Its Underlying Earnings Potential

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. This article will consider whether Grupa Azoty Zaklady Chemiczne Police's (WSE:PCE) statutory profits are a good guide to its underlying earnings.

While Grupa Azoty Zaklady Chemiczne Police was able to generate revenue of zł2.35b in the last twelve months, we think its profit result of zł47.0m was more important.

Check out our latest analysis for Grupa Azoty Zaklady Chemiczne Police

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So this article aims to better understand Grupa Azoty Zaklady Chemiczne Police's underlying earnings power by taking a look at how dilution, and unusual items are impacting it, and considering how well those paper profits are being converted into cash flow. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grupa Azoty Zaklady Chemiczne Police.

A Closer Look At Grupa Azoty Zaklady Chemiczne Police'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'.

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.

Grupa Azoty Zaklady Chemiczne Police has an accrual ratio of 0.37 for the year to September 2020. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of zł758m, in contrast to the aforementioned profit of zł47.0m. We also note that Grupa Azoty Zaklady Chemiczne Police's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of zł758m. Having said that, there is more to consider. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Grupa Azoty Zaklady Chemiczne Police expanded the number of shares on issue by 66% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Grupa Azoty Zaklady Chemiczne Police's EPS by clicking here.

A Look At The Impact Of Grupa Azoty Zaklady Chemiczne Police's Dilution on Its Earnings Per Share (EPS).

We don't have any data on the company's profits from three years ago. However, profit was steady in the last year. But EPS was considerably worse, since it declined 34% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

If Grupa Azoty Zaklady Chemiczne Police's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Grupa Azoty Zaklady Chemiczne Police's profit suffered from unusual items, which reduced profit by zł5.7m in the last twelve months. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Grupa Azoty Zaklady Chemiczne Police doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Grupa Azoty Zaklady Chemiczne Police's Profit Performance

Summing up, Grupa Azoty Zaklady Chemiczne Police's unusual items suggest that its statutory earnings were temporarily depressed, and its accrual ratio indicates a lack of free cash flow relative to profit. And the dilution means that per-share results are weaker than the bottom line might imply. Considering all this we'd argue Grupa Azoty Zaklady Chemiczne Police's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Grupa Azoty Zaklady Chemiczne Police.

Our examination of Grupa Azoty Zaklady Chemiczne Police has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.

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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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