Robust Earnings May Not Tell The Whole Story For Aquila Part Prod Com (BVB:AQ)

Last week's profit announcement from Aquila Part Prod Com S.A. (BVB:AQ) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

Check out our latest analysis for Aquila Part Prod Com

A Closer Look At Aquila Part Prod Com's 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. 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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2022, Aquila Part Prod Com recorded an accrual ratio of 0.23. Unfortunately, that means its free cash flow fell significantly short of its reported profits. To wit, it produced free cash flow of RON31m during the period, falling well short of its reported profit of RON91.2m. Aquila Part Prod Com shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for Aquila Part Prod Com shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Aquila Part Prod Com.

Our Take On Aquila Part Prod Com's Profit Performance

Aquila Part Prod Com didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Aquila Part Prod Com's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Aquila Part Prod Com as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Aquila Part Prod Com, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Aquila Part Prod Com's profit. 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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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.