One United Properties' (BVB:ONE) Earnings Are Of Questionable Quality

One United Properties SA's (BVB:ONE) stock was strong after they reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

See our latest analysis for One United Properties

Zooming In On One United Properties' 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 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 2022, One United Properties recorded an accrual ratio of 0.21. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. To wit, it produced free cash flow of RON214m during the period, falling well short of its reported profit of RON520.0m. At this point we should mention that One United Properties did manage to increase its free cash flow in the last twelve months 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

As it happens, there are a few different things to consider when we look at One United Properties' profit and the last one we'll mention is RON98m gain booked as unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. Which is hardly surprising, given the name. If One United Properties 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 One United Properties' Profit Performance

Summing up, One United Properties received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue One United Properties' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into One United Properties, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for One United Properties (2 are a bit unpleasant!) and we strongly recommend you look at these before investing.

Our examination of One United Properties 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 are plenty of other ways to inform your opinion of a company. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.