We Think That There Are Issues Underlying Dadelo's (WSE:DAD) Earnings

Despite posting some strong earnings, the market for Dadelo S.A.'s (WSE:DAD) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Dadelo

Examining Cashflow Against Dadelo'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. 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.

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 June 2021, Dadelo recorded an accrual ratio of 0.69. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of zł6.26m, a look at free cash flow indicates it actually burnt through zł22m in the last year. We saw that FCF was zł2.4m a year ago though, so Dadelo has at least been able to generate positive FCF in the past.

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

Our Take On Dadelo's Profit Performance

As we have made quite clear, we're a bit worried that Dadelo didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Dadelo'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. 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 Dadelo, you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for Dadelo (1 is significant!) that we believe deserve your full attention.

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