Shareholders Will Be Pleased With The Quality of Bredband2 i Skandinavien's (STO:BRE2) Earnings

Even though Bredband2 i Skandinavien AB (publ)'s (STO:BRE2) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

View our latest analysis for Bredband2 i Skandinavien

A Closer Look At Bredband2 i Skandinavien's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

For the year to June 2024, Bredband2 i Skandinavien had an accrual ratio of -0.27. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr220m during the period, dwarfing its reported profit of kr98.4m. Bredband2 i Skandinavien 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 Bredband2 i Skandinavien's Profit Performance

Happily for shareholders, Bredband2 i Skandinavien produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Bredband2 i Skandinavien's statutory profit actually understates its earnings potential! And the EPS is up 51% annually, over the last three years. 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. Obviously, we love to consider the historical data to inform our opinion of a company. But it can be really valuable to consider what other analysts are forecasting. Luckily, you can check out what analysts are forecasting by clicking here.

This note has only looked at a single factor that sheds light on the nature of Bredband2 i Skandinavien's 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. 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.