DevPort's (STO:DEVP B) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with DevPort AB (publ)'s (STO:DEVP B) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for DevPort

Zooming In On DevPort'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 September 2024, DevPort recorded an accrual ratio of -0.25. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of kr52m during the period, dwarfing its reported profit of kr31.8m. DevPort's year-on-year free cash flow was as flat as two-day-old fizzy drink.

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

Our Take On DevPort's Profit Performance

Happily for shareholders, DevPort produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think DevPort's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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. If you want to do dive deeper into DevPort, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for DevPort and you'll want to know about these.

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