Statutory Profit Doesn't Reflect How Good Arla Plast's (STO:ARPL) Earnings Are

When companies post strong earnings, the stock generally performs well, just like Arla Plast AB's (STO:ARPL) stock has recently. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for Arla Plast

Examining Cashflow Against Arla Plast's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Arla Plast has an accrual ratio of -0.13 for the year to December 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of kr166m in the last year, which was a lot more than its statutory profit of kr97.9m. Arla Plast shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Arla Plast's Profit Performance

As we discussed above, Arla Plast has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Arla Plast's statutory profit actually understates its earnings potential! And the EPS is up 37% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Arla Plast has 1 warning sign and it would be unwise to ignore it.

Today we've zoomed in on a single data point to better understand the nature of Arla Plast'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 with significant insider holdings 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.