Statutory Profit Doesn't Reflect How Good Rompetrol Rafinare's (BVB:RRC) Earnings Are

Rompetrol Rafinare S.A.'s (BVB:RRC) strong earnings report was rewarded with a positive stock price move. We have done some analysis, and we found several positive factors beyond the profit numbers.

Our analysis indicates that RRC is potentially undervalued!

Examining Cashflow Against Rompetrol Rafinare'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. 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. 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 2022, Rompetrol Rafinare had an accrual ratio of -0.42. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$312m during the period, dwarfing its reported profit of US$35.3m. Notably, Rompetrol Rafinare had negative free cash flow last year, so the US$312m it produced this year was a welcome improvement. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rompetrol Rafinare.

The Impact Of Unusual Items On Profit

Rompetrol Rafinare's profit was reduced by unusual items worth US$49m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Rompetrol Rafinare to produce a higher profit next year, all else being equal.

Our Take On Rompetrol Rafinare's Profit Performance

In conclusion, both Rompetrol Rafinare's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Rompetrol Rafinare's underlying earnings potential is as good as, or probably even better, than the statutory profit makes it seem! If you want to do dive deeper into Rompetrol Rafinare, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Rompetrol Rafinare you should know about.

After our examination into the nature of Rompetrol Rafinare's profit, we've come away optimistic for the company. 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. 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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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.