Eurotel's (WSE:ETL) Earnings Are Growing But Is There More To The Story?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Eurotel (WSE:ETL).

We like the fact that Eurotel made a profit of zł18.3m on its revenue of zł432.6m, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Eurotel

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a result, we think it's well worth considering what Eurotel'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 Eurotel.

Examining Cashflow Against Eurotel'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. The ratio shows us how much a company's profit exceeds its FCF.

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

For the year to September 2020, Eurotel had an accrual ratio of -0.28. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of zł26m during the period, dwarfing its reported profit of zł18.3m. Eurotel's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Our Take On Eurotel's Profit Performance

Happily for shareholders, Eurotel produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Eurotel's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 56% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Eurotel as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Eurotel, and understanding them should be part of your investment process.

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