Strong Pittler Maschinenfabrik (FRA:PIT) earnings have weak fundamentals

Pittler Maschinenfabrik AG (FRA:PIT) A robust earnings report failed to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Discover our latest analysis for Pittler Maschinenfabrik

DB:PIT Earnings & Earnings History May 7, 2022

Pittler Maschinenfabrik cash flow vs. earnings review

A key financial ratio used to measure a company’s ability to convert earnings into free cash flow (FCF) is the exercise ratio. The strike ratio subtracts the FCF from the profit for a given period and divides the result by the average operating assets of the company over that period. The ratio shows us how much a company’s profit exceeds its FCF.

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 suggest. While it’s fine to have a positive accrual ratio, indicating some level of non-monetary benefits, a high accrual ratio is arguably a bad thing, as it indicates that the earnings on paper do not match the cash flow. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”

For the year to December 2021, Pittler Maschinenfabrik had an accrual ratio of 0.21. We can therefore deduce that its free cash flow is much lower than the coverage of its statutory profit. In the last year he had actually negative free cash flow of €11k, in contrast to the aforementioned profit of €1.54m. It should be noted that Pittler Maschinenfabrik generated a positive FCF of €307,000 a year ago, so at least they have done so in the past. A silver lining for Pittler Maschinenfabrik shareholders is that its accrual ratio was significantly better last year, giving reason to believe it could return to a stronger cash conversion in the future. Shareholders should look for an improvement in cash flow over current year earnings, if that is indeed the case.

To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Pittler Maschinenfabrik’s balance sheet.

Our view on Pittler Maschinenfabrik’s earnings performance

Pittler Maschinenfabrik’s accrual rate for the past 12 months means the cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. For this reason, we believe that Pittler Maschinenfabrik’s statutory earnings may be better than its underlying earnings capacity. On the bright side, the company has shown enough improvement to post a profit this year, after losing money last year. The aim of this article has been to assess how much we can rely on statutory income to reflect business potential, but there is much more to consider. Keep in mind that when it comes to analyzing a stock, the risks involved should be noted. Example: we have identified 3 warning signs for Pittler Maschinenfabrik you should be aware.

Today, we zoomed in on a single data point to better understand the nature of Pittler Maschinenfabrik’s profits. But there are many other ways to inform your opinion about a company. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.