The market for Flexopack Société Anonyme Commercial and Industrial Plastics Company’s (ATH:FLEXO) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.
Zooming In On Flexopack Société Anonyme Commercial and Industrial Plastics’ 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. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
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.
Over the twelve months to June 2022, Flexopack Société Anonyme Commercial and Industrial Plastics recorded an accrual ratio of 0.23. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of €7.2m, in contrast to the aforementioned profit of €13.9m. We saw that FCF was €1.3m a year ago though, so Flexopack Société Anonyme Commercial and Industrial Plastics has at least been able to generate positive FCF in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Flexopack Société Anonyme Commercial and Industrial Plastics.
Our Take On Flexopack Société Anonyme Commercial and Industrial Plastics’ Profit Performance
Flexopack Société Anonyme Commercial and Industrial Plastics didn’t convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Flexopack Société Anonyme Commercial and Industrial Plastics’ statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate 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. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. Case in point: We’ve spotted 3 warning signs for Flexopack Société Anonyme Commercial and Industrial Plastics you should be mindful of and 1 of them is a bit unpleasant.
This note has only looked at a single factor that sheds light on the nature of Flexopack Société Anonyme Commercial and Industrial Plastics’ profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.
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