Some May Be Optimistic About S.C. Prebet Aiud's (BVB:PREB) Earnings

Shareholders appeared unconcerned with S.C. Prebet Aiud S.A.'s (BVB:PREB) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

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A Closer Look At S.C. Prebet Aiud'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). 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2024, S.C. Prebet Aiud recorded an accrual ratio of -0.32. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of RON29m in the last year, which was a lot more than its statutory profit of RON4.84m. Notably, S.C. Prebet Aiud had negative free cash flow last year, so the RON29m it produced this year was a welcome improvement.

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

Our Take On S.C. Prebet Aiud's Profit Performance

As we discussed above, S.C. Prebet Aiud's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that S.C. Prebet Aiud's statutory profit actually understates its earnings potential! And the EPS is up 25% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into S.C. Prebet Aiud, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for S.C. Prebet Aiud (of which 1 is significant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of S.C. Prebet Aiud'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 with high insider ownership.

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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.