Solid Earnings Reflect Atlanta Poland's (WSE:ATP) Strength As A Business
Atlanta Poland S.A. ( WSE:ATP ) just reported healthy earnings but the stock price didn't move much. Our analysis... Atlanta Poland S.A. (WSE:ATP) reported solid earnings but its stock price did not move. The accrual ratio from cashflow is a key measure for assessing a company's ability to match its profit to its own free cash flow. However, this is seen as a bad thing for a company with a high accruer ratio, which indicates paper profits are not backed by free cashflow. Over the year leading up to December 2023, Atlanta Poland recorded an accurnal ratio of -0.16, indicating it has very good cash conversion. However its earnings in the last year significantly understated its free flow. Furthermore, free cash Flow of zł43m was higher than its statutory profit of zaun 21.7m.
Published : 4 weeks ago by Simply Wall St in Finance
Atlanta Poland S.A. (WSE:ATP) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.
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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.
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 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. 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 December 2023, Atlanta Poland recorded an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of zł43m in the last year, which was a lot more than its statutory profit of zł21.7m. Atlanta Poland's free cash flow improved over the last year, which is generally good to see.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Atlanta Poland.
Our Take On Atlanta Poland's Profit Performance
As we discussed above, Atlanta Poland's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Atlanta Poland's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Atlanta Poland has 3 warning signs we think you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of Atlanta Poland'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. 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.
Topics: Markets