Although secunet Security Networks Aktiengesellschaft (ETR:YSN) posted strong earnings, investors seemed disappointed. We did some research and believe they are being unnecessarily pessimistic.
Check out our latest analysis for secunet Security Networks
The earnings of secunet Security Networks in detail
Many investors have never heard of the Accrual ratio from cash flowbut it is actually a useful measure of how well a company’s profit is covered by free cash flow (FCF) over a given period. Simply put, this ratio subtracts FCF from net income and divides that number by the company’s average funds from operations over that period. This ratio tells us how much of a company’s profit is not covered by free cash flow.
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings would suggest. This is not to say that we should be concerned about a positive accrual ratio, but it is worth noting when the accrual ratio is quite high. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accruals tend to be less profitable in the future.”
For the year to June 2024, secunet Security Networks had an accrual ratio of -0.18. As a result, statutory profits were much lower than free cash flow. Over the last twelve months, the company reported free cash flow of €48m, significantly more than its reported profit of €27.6m. secunet Security Networks’ free cash flow improved over the last year, which is generally pleasing. However, there is more to it than that. The accrual ratio reflects, at least in part, the impact of unusual items on statutory profit.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.
How do unusual items affect profits?
While the provisioning ratio could be a good sign, we also note that secunet Security Networks’ profit was boosted by €2.7m worth of exceptional items over the last twelve months. While we like to see profit increases, we tend to be a bit more cautious when unusual items have made a big contribution. When we analyzed the vast majority of listed companies globally, we found that significant unusual items are often not repeated. Which is hardly surprising given the name. Therefore, assuming these unusual items do not reappear in the current year, we would expect weaker profit next year (i.e. in the absence of business growth).
Our assessment of secunet Security Networks’ earnings development
To sum up, secunet Security Networks’ accrual ratio suggests that its statutory profits are of good quality, but on the other hand, profits have been boosted by unusual items. Taking all this into account, we’d argue that secunet Security Networks’ earnings result is a pretty good indicator of its true profitability, albeit a bit conservative. While it’s really important to consider how well a company’s statutory profits reflect its true earnings power, it’s also worth taking a look at what analysts are forecasting for the future, so feel free to check out our free chart of analyst forecasts.
Our research into secunet Security Networks has focused on certain factors that can make the company’s earnings look better than they are. But there is always more to discover if you are able to focus on the small details. For example, many people consider a high return on equity to indicate a favorable business situation, while others like to “follow the money” and look for stocks that insiders are buying. You might want to check this out. free Collection of companies with high return on equity or this list of stocks with high insider ownership.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
