Proact IT Group's (STO:PACT) Soft Earnings Are Actually Better Than They Appear

The market was pleased with the recent earnings report from Proact IT Group AB (publ) (STO:PACT), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.

Check out our latest analysis for Proact IT Group

Examining Cashflow Against Proact IT Group'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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".

For the year to December 2023, Proact IT Group had an accrual ratio of -0.40. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of kr487m, well over the kr172.6m it reported in profit. Proact IT Group's free cash flow improved over the last year, which is generally good to see.

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 Proact IT Group's Profit Performance

Happily for shareholders, Proact IT Group produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Proact IT Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 31% annually, 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 1 warning sign for Proact IT Group you should be aware of.

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