Cyfrowe Centrum Serwisowe Spólka Akcyjna's (WSE:CCS) Solid Profits Have Weak Fundamentals

Cyfrowe Centrum Serwisowe Spólka Akcyjna's (WSE:CCS) stock was strong after they reported robust earnings. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

See our latest analysis for Cyfrowe Centrum Serwisowe Spólka Akcyjna

A Closer Look At Cyfrowe Centrum Serwisowe 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".

Cyfrowe Centrum Serwisowe Spólka Akcyjna has an accrual ratio of 1.02 for the year to March 2022. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. To wit, it produced free cash flow of zł2.8m during the period, falling well short of its reported profit of zł6.02m. Cyfrowe Centrum Serwisowe Spólka Akcyjna's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits. The good news for shareholders is that Cyfrowe Centrum Serwisowe Spólka Akcyjna's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On Cyfrowe Centrum Serwisowe Spólka Akcyjna's Profit Performance

As we discussed above, we think Cyfrowe Centrum Serwisowe 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 Cyfrowe Centrum Serwisowe Spólka Akcyjna's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 45% EPS growth 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - Cyfrowe Centrum Serwisowe Spólka Akcyjna has 2 warning signs we think you should be aware of.

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