Advanced Soltech Sweden’s (STO:ASAB) solid earnings have weak fundamentals
Advanced Soltech Sweden AB (publ)’s (STO:ASAB)’s robust earnings report failed to move the market for its stock. Our analysis suggests that this may be because shareholders have noticed some underlying factors.
See our latest analysis for Advanced Soltech Sweden
A closer look at Advanced Soltech Sweden’s results
Many investors have not heard of accrual ratio from cash flow, but it’s actually a useful measure of how well a company’s earnings are backed by free cash flow (FCF) over a given period. The accrual ratio subtracts FCF from earnings for a given period and divides the result by the company’s average current assets during that time. You can think of the cash flow accrual ratio as the “non-FCF earnings ratio.”
As a result, a negative accrual rate is positive for the company and a positive accrual rate is negative. While having a positive accrual rate is not a problem, indicating some level of non-cash profits, a high accrual rate is arguably a bad thing, as it indicates paper profits are not matched by cash flow. That’s because some academic studies have suggested that high accrual rates tend to lead to lower profits or less profit growth.
In the twelve months to June 2022, Advanced Soltech Sweden recorded an accrual ratio of 0.26. We can therefore conclude that its free cash flow did not cover its statutory profit. In the last twelve months, it actually had negative free cash flow, with an outflow of SEK 296 million despite the profit of SEK 32.2 million mentioned above. We also note that Advanced Soltech Sweden’s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of SEK 296 million.
It might make you wonder what analysts are predicting in terms of future profitability. Luckily, you can click here to see an interactive graph showing future profitability, based on their estimates.
Our view of Advanced Soltech Sweden’s earnings performance
Advanced Soltech Sweden’s accrual rate for the last twelve months means that cash conversion is less than ideal, which is a negative when it comes to our view of its performance. Because of this, we think it may be that Advanced Soltech Sweden’s statutory earnings are better than its underlying earnings power. The good news is that it made a profit in the last twelve months, despite its previous loss. Ultimately, it’s important to consider more than just the factors above if you want to properly understand the company. If you want to know more about Advanced Soltech Sweden as a company, it is important to be aware of any risks it faces. Be aware that Advanced Soltech Sweden shows 4 warning signs in our investment analysis and 3 of them don’t fit very well with us…
This note has only looked at a single factor that highlights the nature of Advanced Soltech Sweden’s profit. But there is always more to discover if you are able to focus your mind on details. Some people believe that a high return on equity is a good sign of a quality business. Although it may take some research on your behalf, you may find this free collection of companies boasting high returns on equity, or this list of stocks insiders buy to be useful.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only by using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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