Here's Why Kopparbergs Bryggeri's (NGM:KOBR B) Statutory Earnings Are Arguably Too Conservative

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Kopparbergs Bryggeri (NGM:KOBR B).

We like the fact that Kopparbergs Bryggeri made a profit of kr206.1m on its revenue of kr2.04b, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

View our latest analysis for Kopparbergs Bryggeri

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Today, we'll discuss Kopparbergs Bryggeri's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kopparbergs Bryggeri.

Examining Cashflow Against Kopparbergs Bryggeri'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2020, Kopparbergs Bryggeri recorded an accrual ratio of -0.40. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of kr502m, well over the kr206.1m it reported in profit. Notably, Kopparbergs Bryggeri had negative free cash flow last year, so the kr502m it produced this year was a welcome improvement.

Our Take On Kopparbergs Bryggeri's Profit Performance

As we discussed above, Kopparbergs Bryggeri's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Kopparbergs Bryggeri's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 20% annually, over the last three years. 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. Our analysis shows 2 warning signs for Kopparbergs Bryggeri (1 is concerning!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Kopparbergs Bryggeri'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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