We Think XANO Industri's (STO:XANO B) Robust Earnings Are Conservative

Even though XANO Industri AB (publ)'s (STO:XANO B) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

View our latest analysis for XANO Industri

Examining Cashflow Against XANO Industri'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

XANO Industri has an accrual ratio of -0.15 for the year to December 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of kr402m in the last year, which was a lot more than its statutory profit of kr195.0m. XANO Industri's free cash flow improved over the last year, which is generally good to see.

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

Our Take On XANO Industri's Profit Performance

As we discussed above, XANO Industri has perfectly satisfactory free cash flow relative to profit. Because of this, we think XANO Industri's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 29% per year over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into XANO Industri, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 4 warning signs for XANO Industri and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of XANO Industri'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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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