The market for Splendid Medien AG's (ETR:SPM) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Splendid Medien

Examining Cashflow Against Splendid Medien's 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. The accrual 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 time. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to June 2024, Splendid Medien recorded an accrual ratio of -0.45. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of €5.8m in the last year, which was a lot more than its statutory profit of €2.50m. Given that Splendid Medien had negative free cash flow in the prior corresponding period, the trailing twelve month resul of €5.8m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Splendid Medien.

Our Take On Splendid Medien's Profit Performance

As we discussed above, Splendid Medien's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Splendid Medien's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also good to see that its earnings per share have improved a bit 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for Splendid Medien and we think they deserve your attention.