Here's Why We Think MakoLab Spólka Akcyjna's (WSE:MLB) Statutory Earnings Might Be Conservative

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing MakoLab Spólka Akcyjna (WSE:MLB).

It's good to see that over the last twelve months MakoLab Spólka Akcyjna made a profit of zł4.84m on revenue of zł49.0m. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for MakoLab Spólka Akcyjna

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what MakoLab Spólka Akcyjna's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MakoLab Spólka Akcyjna.

Examining Cashflow Against MakoLab Spólka Akcyjna'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 September 2020, MakoLab Spólka Akcyjna recorded an accrual ratio of -0.65. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of zł8.9m in the last year, which was a lot more than its statutory profit of zł4.84m. MakoLab Spólka Akcyjna shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On MakoLab Spólka Akcyjna's Profit Performance

Happily for shareholders, MakoLab Spólka Akcyjna produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think MakoLab Spólka Akcyjna's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - MakoLab Spólka Akcyjna has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of MakoLab Spólka Akcyjna's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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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