We Think You Should Be Aware Of Some Concerning Factors In Hotel Fast SSE's (STO:HOTEL) Earnings

Following the solid earnings report from Hotel Fast SSE AB (publ) (STO:HOTEL), the market responded by bidding up the stock price. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

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Zooming In On Hotel Fast SSE'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2025, Hotel Fast SSE had an accrual ratio of 0.29. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of kr12.9m, a look at free cash flow indicates it actually burnt through kr64m in the last year. We also note that Hotel Fast SSE's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of kr64m.

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

Our Take On Hotel Fast SSE's Profit Performance

Hotel Fast SSE's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Hotel Fast SSE's statutory profits are better than its underlying earnings power. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 while earnings quality is important, it's equally important to consider the risks facing Hotel Fast SSE at this point in time. Be aware that Hotel Fast SSE is showing 6 warning signs in our investment analysis and 5 of those are significant...

Today we've zoomed in on a single data point to better understand the nature of Hotel Fast SSE'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 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.