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IVU Traffic Technologies AG's (ETR:IVU) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
Check out our latest analysis for IVU Traffic Technologies
Zooming In On IVU Traffic Technologies' 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to September 2024, IVU Traffic Technologies recorded an accrual ratio of 0.29. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Over the last year it actually had negative free cash flow of €4.3m, in contrast to the aforementioned profit of €12.2m. We saw that FCF was €7.1m a year ago though, so IVU Traffic Technologies has at least been able to generate positive FCF in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of IVU Traffic Technologies.
Our Take On IVU Traffic Technologies' Profit Performance
IVU Traffic Technologies' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that IVU Traffic Technologies' 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. 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. So while earnings quality is important, it's equally important to consider the risks facing IVU Traffic Technologies at this point in time. Be aware that IVU Traffic Technologies is showing 2 warning signs in our investment analysis and 1 of those is significant...