Robust Earnings May Not Tell The Whole Story For DRAGO entertainment Spólka Akcyjna (WSE:DGE)

By
Simply Wall St
Published
February 19, 2022
WSE:DGE
Source: Shutterstock

DRAGO entertainment Spólka Akcyjna's (WSE:DGE) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for DRAGO entertainment Spólka Akcyjna

earnings-and-revenue-history
WSE:DGE Earnings and Revenue History February 19th 2022

A Closer Look At DRAGO entertainment Spólka 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. 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 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.

For the year to December 2021, DRAGO entertainment Spólka Akcyjna had an accrual ratio of 0.49. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. In fact, it had free cash flow of zł2.9m in the last year, which was a lot less than its statutory profit of zł4.08m. Given that DRAGO entertainment Spólka Akcyjna had negative free cash flow in the prior corresponding period, the trailing twelve month resul of zł2.9m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of DRAGO entertainment Spólka Akcyjna.

Our Take On DRAGO entertainment Spólka Akcyjna's Profit Performance

As we have made quite clear, we're a bit worried that DRAGO entertainment Spólka Akcyjna didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that DRAGO entertainment Spólka Akcyjna's underlying earnings power is lower than its statutory profit. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Be aware that DRAGO entertainment Spólka Akcyjna is showing 5 warning signs in our investment analysis and 1 of those is significant...

This note has only looked at a single factor that sheds light on the nature of DRAGO entertainment Spólka Akcyjna'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. 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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