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The market seemed underwhelmed by the solid earnings posted by Ceconomy AG (ETR:CEC) recently. Our analysis suggests that there are some reasons for hope that investors should be aware of.
Check out our latest analysis for Ceconomy
Examining Cashflow Against Ceconomy'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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Ceconomy has an accrual ratio of -1.46 for the year to September 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of €645m in the last year, which was a lot more than its statutory profit of €76.0m. Ceconomy's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
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 Ceconomy's Profit Performance
Happily for shareholders, Ceconomy produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Ceconomy's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Ceconomy as a business, it's important to be aware of any risks it's facing. For example - Ceconomy has 1 warning sign we think you should be aware of.