Investors Shouldn't Be Too Comfortable With Zaklad Budowy Maszyn ZREMB - Chojnice's (WSE:ZRE) Earnings

Zaklad Budowy Maszyn ZREMB - Chojnice S.A.'s (WSE:ZRE) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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Examining Cashflow Against Zaklad Budowy Maszyn ZREMB - Chojnice'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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Zaklad Budowy Maszyn ZREMB - Chojnice has an accrual ratio of 0.33 for the year to March 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. To wit, it produced free cash flow of zł806k during the period, falling well short of its reported profit of zł11.3m. Notably, Zaklad Budowy Maszyn ZREMB - Chojnice had negative free cash flow last year, so the zł806k it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zaklad Budowy Maszyn ZREMB - Chojnice.

Our Take On Zaklad Budowy Maszyn ZREMB - Chojnice's Profit Performance

As we discussed above, we think Zaklad Budowy Maszyn ZREMB - Chojnice's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Zaklad Budowy Maszyn ZREMB - Chojnice's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Zaklad Budowy Maszyn ZREMB - Chojnice is showing 3 warning signs in our investment analysis and 1 of those shouldn't be ignored...

This note has only looked at a single factor that sheds light on the nature of Zaklad Budowy Maszyn ZREMB - Chojnice'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. 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 with significant insider holdings to be useful.

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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.