PCF Group Spólka Akcyjna's (WSE:PCF) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for PCF Group Spólka Akcyjna's (WSE:PCF) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for PCF Group Spólka Akcyjna

Zooming In On PCF Group Spólka Akcyjna's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 2020, PCF Group Spólka Akcyjna had an accrual ratio of 0.52. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of zł9.2m during the period, falling well short of its reported profit of zł24.6m. Notably, PCF Group Spólka Akcyjna had negative free cash flow last year, so the zł9.2m 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 PCF Group Spólka Akcyjna.

Our Take On PCF Group Spólka Akcyjna's Profit Performance

As we discussed above, we think PCF 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 PCF Group Spólka Akcyjna's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for PCF Group Spólka Akcyjna and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of PCF Group Spólka Akcyjna's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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