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Despite posting some strong earnings, the market for Sif Holding N.V.'s (AMS:SIFG) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.
Check out our latest analysis for Sif Holding
Examining Cashflow Against Sif Holding's Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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".
Sif Holding has an accrual ratio of 0.89 for the year to June 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of €111m despite its profit of €11.4m, mentioned above. It's worth noting that Sif Holding generated positive FCF of €5.1m a year ago, so at least they've done it in the past.
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 Sif Holding's Profit Performance
As we have made quite clear, we're a bit worried that Sif Holding didn't back up the last year's profit with free cashflow. For this reason, we think that Sif Holding's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 35% 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for Sif Holding and we think they deserve your attention.