In This Article:
Investors were disappointed by SMA Solar Technology AG's (ETR:S92 ) latest earnings release. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.
Check out our latest analysis for SMA Solar Technology
Examining Cashflow Against SMA Solar Technology'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.
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.
For the year to June 2024, SMA Solar Technology had an accrual ratio of 0.87. 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. Over the last year it actually had negative free cash flow of €245m, in contrast to the aforementioned profit of €166.3m. It's worth noting that SMA Solar Technology generated positive FCF of €90m 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 SMA Solar Technology's Profit Performance
As we have made quite clear, we're a bit worried that SMA Solar Technology didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that SMA Solar Technology's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that SMA Solar Technology has 3 warning signs (2 are potentially serious!) that deserve your attention before going any further with your analysis.