Stock Analysis

genXone (WSE:GX1) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

WSE:GX1
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genXone S.A. (WSE:GX1) just reported some strong earnings, and the market rewarded them with a positive share price move. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

Check out our latest analysis for genXone

earnings-and-revenue-history
WSE:GX1 Earnings and Revenue History February 23rd 2021

Examining Cashflow Against genXone'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2020, genXone recorded an accrual ratio of 0.75. 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 zł2.3b in the last year, which was a lot less than its statutory profit of zł7.16b. Notably, genXone had negative free cash flow last year, so the zł2.3b 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 genXone.

Our Take On genXone's Profit Performance

As we have made quite clear, we're a bit worried that genXone didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that genXone's underlying earnings power is lower than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over 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 while earnings quality is important, it's equally important to consider the risks facing genXone at this point in time. Every company has risks, and we've spotted 3 warning signs for genXone (of which 1 is potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on the nature of genXone'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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