We Like RugVista Group's (STO:RUG) Earnings For More Than Just Statutory Profit

Despite posting healthy earnings, RugVista Group AB (publ)'s (STO:RUG ) stock has been quite weak. Along with the solid headline numbers, we think that investors have some reasons for optimism.

Check out our latest analysis for RugVista Group

A Closer Look At RugVista Group'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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".

Over the twelve months to December 2023, RugVista Group recorded an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of kr115m during the period, dwarfing its reported profit of kr70.0m. Notably, RugVista Group had negative free cash flow last year, so the kr115m it produced this year was a welcome improvement.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On RugVista Group's Profit Performance

As we discussed above, RugVista Group has perfectly satisfactory free cash flow relative to profit. Because of this, we think RugVista Group's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 19% over the last twelve months. 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. If you want to do dive deeper into RugVista Group, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for RugVista Group and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of RugVista Group'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. 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 that insiders are buying 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.