Some Investors May Be Willing To Look Past AROBS Transilvania Software's (BVB:AROBS) Soft Earnings

Soft earnings didn't appear to concern AROBS Transilvania Software S.A.'s (BVB:AROBS) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

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Zooming In On AROBS Transilvania Software'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

AROBS Transilvania Software has an accrual ratio of -0.28 for the year to March 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of RON90m in the last year, which was a lot more than its statutory profit of RON19.9m. AROBS Transilvania Software's free cash flow improved over the last year, which is generally good to see. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AROBS Transilvania Software.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. AROBS Transilvania Software expanded the number of shares on issue by 21% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out AROBS Transilvania Software's historical EPS growth by clicking on this link.

A Look At The Impact Of AROBS Transilvania Software's Dilution On Its Earnings Per Share (EPS)

AROBS Transilvania Software's net profit dropped by 59% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 23%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 36% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if AROBS Transilvania Software's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On AROBS Transilvania Software's Profit Performance

In conclusion, AROBS Transilvania Software has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Based on these factors, we think that AROBS Transilvania Software's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about AROBS Transilvania Software as a business, it's important to be aware of any risks it's facing. For example, we've found that AROBS Transilvania Software has 2 warning signs (1 shouldn't be ignored!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 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.