Statutory Profit Doesn't Reflect How Good S.C. Santierul Naval Orsova's (BVB:SNO) Earnings Are

Even though S.C. Santierul Naval Orsova S.A.'s (BVB:SNO) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for S.C. Santierul Naval Orsova

Zooming In On S.C. Santierul Naval Orsova'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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".

S.C. Santierul Naval Orsova has an accrual ratio of -0.17 for the year to December 2020. 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 RON17m in the last year, which was a lot more than its statutory profit of RON4.65m. S.C. Santierul Naval Orsova's free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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

The Impact Of Unusual Items On Profit

Surprisingly, given S.C. Santierul Naval Orsova's accrual ratio implied strong cash conversion, its paper profit was actually boosted by RON358k in unusual items. 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If S.C. 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 S.C. Santierul Naval Orsova's Profit Performance

S.C. Santierul Naval Orsova's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think that S.C. Santierul Naval Orsova's profits are a reasonably conservative guide to its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - S.C. Santierul Naval Orsova has 3 warning signs we think you should be aware of.

Our examination of S.C. Santierul Naval Orsova has focussed on certain factors that can make its earnings look better than they are. 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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