We Like The Quality Of Lime Technologies' (STO:LIME) Earnings

Despite posting healthy earnings, Lime Technologies AB (publ)'s (STO:LIME ) stock has been quite weak. Our analysis suggests that there are some reasons for hope that investors should be aware of.

View our latest analysis for Lime Technologies

Examining Cashflow Against Lime Technologies' 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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Lime Technologies has an accrual ratio of -0.10 for the year to March 2024. 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 kr132m during the period, dwarfing its reported profit of kr86.1m. Lime Technologies shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Lime Technologies' Profit Performance

Lime Technologies' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Lime Technologies' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 32% per year 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 while earnings quality is important, it's equally important to consider the risks facing Lime Technologies at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Lime Technologies.

This note has only looked at a single factor that sheds light on the nature of Lime Technologies' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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. 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.