Shareholders Will Be Pleased With The Quality of Novotek's (STO:NTEK B) Earnings

Novotek AB's (STO:NTEK B) earnings announcement last week was disappointing for investors, despite the decent profit numbers. We have done some analysis and have found some comforting factors beneath the profit numbers.

See our latest analysis for Novotek

A Closer Look At Novotek'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. 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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to June 2024, Novotek recorded an accrual ratio of -0.19. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr57m during the period, dwarfing its reported profit of kr36.7m. Novotek 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 Novotek.

Our Take On Novotek's Profit Performance

Happily for shareholders, Novotek produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Novotek's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 14% in the last year. 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'd like to know more about Novotek as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Novotek you should be aware of.

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