The subdued market reaction suggests that Schlatter Industries AG's (VTX:STRN) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.
Examining Cashflow Against Schlatter Industries' Earnings
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.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.
Over the twelve months to December 2024, Schlatter Industries recorded an accrual ratio of 0.33. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of CHF9.4m, in contrast to the aforementioned profit of CHF1.55m. It's worth noting that Schlatter Industries generated positive FCF of CHF6.8m a year ago, so at least they've done it in the past. The good news for shareholders is that Schlatter Industries' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Schlatter Industries .
Our Take On Schlatter Industries' Profit Performance
As we discussed above, we think Schlatter Industries' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Schlatter Industries' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 4 warning signs for Schlatter Industries (1 is a bit unpleasant!) that we believe deserve your full attention.