We think Solution Dynamics (NZSE:SDL) earnings are just a baseline for what they can achieve

The muted stock price reaction suggests that Solution Dynamics Limited (NZSE:SDL) Strong earnings offered no surprises. Our analysis suggests investors may be missing out on some promising details.

See our latest analysis for Solution Dynamics

NZSE: SDL Earnings and Revenue History as of September 1, 2022

Solution Dynamics Cash Flow vs. Profit Review

Many investors have not heard of the cash flow equalization ratio, but it’s actually a useful measure of how well a company’s earnings are supported by free cash flow (FCF) over a given period. To get the strike ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. You can think of the cash flow equalization ratio as the “non-FCF profit ratio”.

Therefore, a negative accrual ratio is positive for the company and a positive accrual ratio is negative. That’s not to say we should worry about a positive accumulation ratio, but it’s worth noting where the accumulation ratio is rather high. Notably, there is academic evidence that suggests a high exercise ratio is a bad sign for short-term profits, generally speaking.

Over the twelve months to June 2022, Solution Dynamics recorded an accrual ratio of -0.46. This indicates that its free cash flow has greatly exceeded its statutory profit. Namely, it produced free cash flow of NZ$2.8 million during the period, eclipsing its reported profit of NZ$2.56 million. Solution Dynamics shareholders are no doubt pleased with the improvement in free cash flow over the past twelve months.

To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of the Solution Dynamics balance sheet.

Our view of Solution Dynamics benefit performance

Fortunately for shareholders, Solution Dynamics produced plenty of free cash flow to support its statutory profit numbers. Based on this observation, we consider it possible that Solution Dynamics’ statutory profit actually underestimates its earning potential! Even better, his EPS are progressing strongly, which is a pleasure to see. The aim of this article has been to assess how much we can rely on statutory income to reflect business potential, but there is much more to consider. With this in mind, we would not consider investing in a stock unless we have a thorough understanding of the risks. For example, we found 2 warning signs which you should browse to get a better picture of Solution Dynamics.

Today, we zoomed in on a single data point to better understand the nature of Solution Dynamics’ benefits. But there’s always more to discover if you’re able to focus on the details. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders buy. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.

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.

Calculation of discounted cash flows for each share

Simply Wall St performs a detailed calculation of discounted cash flow every 6 hours for every stock in the market, so if you want to find the intrinsic value of any company, just search here. It’s free.

Comments are closed.