Big Cheese Studio Spolka Akcyjna's (WSE:BCS) Shareholders May Want To Dig Deeper Than Statutory Profit

Big Cheese Studio Spolka Akcyjna (WSE:BCS) just released a solid earnings report, and the stock displayed some strength. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

Check out our latest analysis for Big Cheese Studio Spolka Akcyjna

Examining Cashflow Against Big Cheese Studio Spolka Akcyjna'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Big Cheese Studio Spolka Akcyjna has an accrual ratio of 0.69 for the year to June 2022. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. To wit, it produced free cash flow of zł9.1m during the period, falling well short of its reported profit of zł14.4m. We note, however, that Big Cheese Studio Spolka Akcyjna grew its free cash flow over the last year.

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 Big Cheese Studio Spolka Akcyjna's Profit Performance

As we discussed above, we think Big Cheese Studio Spolka Akcyjna'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 Big Cheese Studio Spolka Akcyjna's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 46% in the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Big Cheese Studio Spolka Akcyjna has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Big Cheese Studio Spolka Akcyjna's profit. 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. 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.