Shareholders will be pleased with the earnings quality of Francotyp-Postalia Holding (ETR:FPH)
The muted stock price reaction suggests that Francotyp-Postalia Holding SA (ETR:FPH) strong earnings offered no surprises. Investors are likely missing some encouraging underlying factors for the company’s future.
Discover our latest analysis for Francotyp-Postalia Holding
Zoom on the results of Francotyp-Postalia Holding
In high finance, the key ratio used to measure a company’s ability to convert reported earnings into free cash flow (FCF) is the exercise ratio (cash). The strike 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 period. The ratio shows us how much a company’s profit exceeds its FCF.
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings suggest. This doesn’t mean that we should worry about a positive accumulation ratio, but it should be noted where the accumulation ratio is rather high. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.
Francotyp-Postalia Holding has an exercise ratio of -0.24 for the year to March 2022. This indicates that its free cash flow has significantly exceeded its statutory profit. Namely, it produced free cash flow of 8.0 million euros during the period, eclipsing its reported profit of 4.83 million euros. Francotyp-Postalia Holding’s free cash flow has actually declined over the past year, which is disappointing, like non-biodegradable balloons. However, that’s not all there is to consider. It can be seen that unusual elements have impacted its statutory profit, and therefore the growth ratio.
This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.
How do unusual items affect profits?
Francotyp-Postalia Holding’s profit was reduced by unusual items worth 12 million euros in the last twelve months, which allowed it to generate a high cash conversion, as evidenced by its unusual items . This is what you would expect to see when a company has a non-monetary charge reducing paper profits. While deductions due to unusual items are disappointing at first, there is a silver lining. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And, after all, that’s exactly what accounting terminology implies. Francotyp-Postalia Holding suffered a fairly significant hit from unusual items during the year to March 2022. All other things being equal, this would likely have the effect of making statutory profit worse than its earnings capacity under- underlying.
Our view on the earnings performance of Francotyp-Postalia Holding
In conclusion, both Francotyp-Postalia Holding’s adjustment rate and its unusual items suggest that its statutory result is probably reasonably conservative. After considering all of this, we believe that the statutory profit of Francotyp-Postalia Holding probably underestimates its profit potential! Keep in mind that when it comes to analyzing a stock, the risks involved should be noted. Every business has risks, and we’ve spotted 2 warning signs for Francotyp-Postalia Holding you should know.
Our review of Francotyp-Postalia Holding has focused on some factors that can make its earnings look better than they are. And it went brilliantly. But there’s always more to discover if you’re able to focus on the details. Some people consider a high return on equity to be a good sign of a quality company. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.