We believe Neurosoft Software Production (BIT:NRST) revenue is a poor guide to profitability

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Despite excellent results, Neurosoft Software Production AG (BIT:NRST) Stocks haven’t moved much over the past week. We decided to deepen our analysis and we believe that investors might be concerned about several worrying factors that we have discovered.

See our latest analysis for Neurosoft Software Production

BIT: NRST Earnings and Revenue History September 29, 2022

Neurosoft Software Production Cash Flow vs. Earnings Review

In high finance, the key ratio used to measure a company’s ability to convert reported earnings into free cash flow (FCF) is the exercise ratio (cash). Put simply, this ratio subtracts FCF from net income and divides that number by the company’s average operating assets 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.”

Neurosoft Software Production has an accrual ratio of 0.45 for the year to June 2022. That means it didn’t generate enough free cash flow to match its profit. Typically, this bodes ill for future profitability. In fact, he had a free cash flow of €644,000 last year, which was well below his statutory profit of €2.00m. Notably, Neurosoft Software Production had negative free cash flow last year, so the €644,000 it produced this year was a welcome improvement. However, that’s not all there is to consider. The adjustment rate reflects the impact of unusual items on the statutory profit, at least in part. The good news for shareholders is that Neurosoft Software Production’s accrual ratio was much better last year, so this year’s poor reading could simply be a case of a short-term mismatch between earnings and FCF. . Therefore, some shareholders might seek a higher cash conversion in the current year.

To note: we always recommend that investors check the strength of the balance sheet. Click here to be redirected to our review of Neurosoft Software Production’s balance sheet.

The impact of unusual items on earnings

The fact that the company had unusual items increasing its earnings by €395,000 last year is probably part of the reason why its accrual ratio was so low. While we like to see increases in earnings, we tend to be a bit more cautious when unusual items have made a big contribution. When we analyzed the numbers of thousands of publicly traded companies, we found that an increase in unusual items in any given year is often not repeated the following year. And, after all, that’s exactly what accounting terminology implies. Assuming these unusual items do not recur in the current year, we would therefore expect earnings to be weaker next year (in the absence of business growth, i.e. ).

Our view on the earnings performance of Neurosoft Software Production

Neurosoft Software Production had a weak accrual ratio, but earnings were boosted by unusual items. Considering all of this, we’d say that Neurosoft Software Production’s earnings probably give an overly generous impression of its level of sustainable profitability. If you want to learn more about Neurosoft Software Production as a company, it is important to be aware of the risks it faces. Example: we have identified 2 warning signs for Neurosoft Software Production you should be careful and one of them is a bit of a concern.

In this article, we’ve looked at a number of factors that can detract from the usefulness of profit numbers, and came out cautious. But there’s always more to discover if you’re able to focus on the details. 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.

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