PCC Rokita SA (WSE:PCR) announced a healthy earnings result recently, and the market rewarded it with a strong stock price reaction. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.
Check out our latest analysis for PCC Rokita
Examining Cashflow Against PCC Rokita'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.
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.
PCC Rokita has an accrual ratio of -0.18 for the year to December 2020. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of zł366m, well over the zł117.4m it reported in profit. PCC Rokita's free cash flow improved over the last year, which is generally good to see.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On PCC Rokita's Profit Performance
As we discussed above, PCC Rokita's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think PCC Rokita's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 26% over the last twelve months. 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 while earnings quality is important, it's equally important to consider the risks facing PCC Rokita at this point in time. To that end, you should learn about the 4 warning signs we've spotted with PCC Rokita (including 1 which is potentially serious).
This note has only looked at a single factor that sheds light on the nature of PCC Rokita'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. 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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About WSE:PCR
PCC Rokita
Designs, produces, and sells chemical products in Poland and internationally.
Flawless balance sheet and undervalued.
