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

Synthaverse S.A.'s (WSE:SVE) 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 Synthaverse

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

Synthaverse has an accrual ratio of 0.36 for the year to September 2024. 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 zł4.45m, a look at free cash flow indicates it actually burnt through zł58m in the last year. We also note that Synthaverse's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of zł58m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Synthaverse.

Our Take On Synthaverse's Profit Performance

As we discussed above, we think Synthaverse's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Synthaverse's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. 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. If you want to do dive deeper into Synthaverse, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Synthaverse (including 2 which are a bit unpleasant).

Today we've zoomed in on a single data point to better understand the nature of Synthaverse'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. 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.