Impressive Earnings May Not Tell The Whole Story For B3 Consulting Group (STO:B3)

Despite announcing strong earnings, B3 Consulting Group AB (publ)'s (STO:B3) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

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Zooming In On B3 Consulting 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). 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. 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 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".

B3 Consulting Group has an accrual ratio of 0.20 for the year to March 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. To wit, it produced free cash flow of kr11m during the period, falling well short of its reported profit of kr84.6m. We note, however, that B3 Consulting Group grew its free cash flow over the last year. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, B3 Consulting Group issued 9.8% more new shares over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of B3 Consulting Group's EPS by clicking here.

How Is Dilution Impacting B3 Consulting Group's Earnings Per Share (EPS)?

As you can see above, B3 Consulting Group has been growing its net income over the last few years, with an annualized gain of 24% over three years. And the 129% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 119% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if B3 Consulting Group can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On B3 Consulting Group's Profit Performance

In conclusion, B3 Consulting Group has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue B3 Consulting Group's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into B3 Consulting Group, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for B3 Consulting Group you should be mindful of and 2 of these bad boys are potentially serious.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.

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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.