Additional Considerations Required While Assessing Farm 51 Group Spólka Akcyjna's (WSE:F51) Strong Earnings

Investors were disappointed with The Farm 51 Group Spólka Akcyjna's (WSE:F51) earnings, despite the strong profit numbers. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

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A Closer Look At Farm 51 Group Spólka Akcyjna'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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2025, Farm 51 Group Spólka Akcyjna recorded an accrual ratio of 0.61. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of zł3.97m, a look at free cash flow indicates it actually burnt through zł6.9m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of zł6.9m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Farm 51 Group Spólka Akcyjna.

Our Take On Farm 51 Group Spólka Akcyjna's Profit Performance

As we discussed above, we think Farm 51 Group Spólka 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 Farm 51 Group Spólka Akcyjna's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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 while earnings quality is important, it's equally important to consider the risks facing Farm 51 Group Spólka Akcyjna at this point in time. To help with this, we've discovered 4 warning signs (1 is potentially serious!) that you ought to be aware of before buying any shares in Farm 51 Group Spólka Akcyjna.

This note has only looked at a single factor that sheds light on the nature of Farm 51 Group Spólka 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.