In This Article:
Despite announcing strong earnings, Elmos Semiconductor SE's (ETR:ELG) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.
See our latest analysis for Elmos Semiconductor
Examining Cashflow Against Elmos Semiconductor's Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Elmos Semiconductor has an accrual ratio of 0.23 for the year to June 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of €16m despite its profit of €104.5m, mentioned above. We also note that Elmos Semiconductor's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of €16m.
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 Elmos Semiconductor's Profit Performance
Elmos Semiconductor didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Elmos Semiconductor's true underlying earnings power is actually less than its statutory profit. But on the bright side, 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. In terms of investment risks, we've identified 1 warning sign with Elmos Semiconductor, and understanding it should be part of your investment process.