Shareholders Can Be Confident That Enter Air Sp. z o.o's (WSE:ENT) Earnings Are High Quality

Investors were underwhelmed by the solid earnings posted by Enter Air Sp. z o.o. (WSE:ENT) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

Check out our latest analysis for Enter Air Sp. z o.o

A Closer Look At Enter Air Sp. z o.o'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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2023, Enter Air Sp. z o.o recorded an accrual ratio of -0.81. 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 zł339m in the last year, which was a lot more than its statutory profit of zł196.4m. Enter Air Sp. z o.o's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Enter Air Sp. z o.o.

Our Take On Enter Air Sp. z o.o's Profit Performance

Happily for shareholders, Enter Air Sp. z o.o produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Enter Air Sp. z o.o'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 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. You can see our latest analysis on Enter Air Sp. z o.o's balance sheet health here.

Today we've zoomed in on a single data point to better understand the nature of Enter Air Sp. z o.o'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. 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. 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.