Solid Earnings May Not Tell The Whole Story For Veteranpoolen (NGM:VPAB B)

The stock price didn't jump after Veteranpoolen AB (publ) (NGM:VPAB B) posted decent earnings last week. We did some digging and believe investors may be worried about some underlying factors in the report.

See our latest analysis for Veteranpoolen

A Closer Look At Veteranpoolen'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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 March 2024, Veteranpoolen recorded an accrual ratio of 0.59. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. In fact, it had free cash flow of kr35m in the last year, which was a lot less than its statutory profit of kr40.9m. Veteranpoolen's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.

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

Our Take On Veteranpoolen's Profit Performance

As we have made quite clear, we're a bit worried that Veteranpoolen didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Veteranpoolen's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 45% per annum growth in EPS for the last three. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 3 warning signs for Veteranpoolen you should be mindful of and 2 of them can't be ignored.

Today we've zoomed in on a single data point to better understand the nature of Veteranpoolen's profit. 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. 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 with significant insider holdings to be useful.

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.