Santierul Naval Orsova's (BVB:SNO) Earnings Are Of Questionable Quality

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

We've discovered 3 warning signs about Santierul Naval Orsova. View them for free.

Zooming In On Santierul Naval Orsova's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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".

Over the twelve months to March 2025, Santierul Naval Orsova recorded an accrual ratio of 0.28. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of RON10m, in contrast to the aforementioned profit of RON5.98m. It's worth noting that Santierul Naval Orsova generated positive FCF of RON16m a year ago, so at least they've done it in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part. One positive for Santierul Naval Orsova shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Check out our latest analysis for Santierul Naval Orsova

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by RON990k, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If Santierul Naval Orsova doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Santierul Naval Orsova's Profit Performance

Santierul Naval Orsova had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Santierul Naval Orsova's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. When we did our research, we found 3 warning signs for Santierul Naval Orsova (2 are potentially serious!) that we believe deserve your full attention.

Our examination of Santierul Naval Orsova has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with significant insider holdings 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.