Zaklady Magnezytowe ROPCZYCE (WSE:RPC) Strong Profits May Be Masking Some Underlying Issues

Following the solid earnings report from Zaklady Magnezytowe ROPCZYCE S.A. (WSE:RPC), the market responded by bidding up the stock price. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

Our analysis indicates that RPC is potentially undervalued!

Examining Cashflow Against Zaklady Magnezytowe ROPCZYCE'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Zaklady Magnezytowe ROPCZYCE has an accrual ratio of 0.20 for the year to September 2022. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of zł39m despite its profit of zł37.6m, mentioned above. It's worth noting that Zaklady Magnezytowe ROPCZYCE generated positive FCF of zł21m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zaklady Magnezytowe ROPCZYCE.

Our Take On Zaklady Magnezytowe ROPCZYCE's Profit Performance

Zaklady Magnezytowe ROPCZYCE didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Zaklady Magnezytowe ROPCZYCE's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 20% per annum growth in EPS for the last three. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Zaklady Magnezytowe ROPCZYCE has 5 warning signs (and 1 which is potentially serious) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Zaklady Magnezytowe ROPCZYCE's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.