Shareholders appeared unconcerned with Paradox Interactive AB (publ)'s (STO:PDX) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.
Zooming In On Paradox Interactive's Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to September 2026, Paradox Interactive recorded an accrual ratio of -0.24. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of kr519m in the last year, which was a lot more than its statutory profit of kr160.5m. Paradox Interactive shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
Check out our latest analysis for Paradox Interactive
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
The Impact Of Unusual Items On Profit
Paradox Interactive's profit was reduced by unusual items worth kr355m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. In the twelve months to September 2026, Paradox Interactive had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.
Our Take On Paradox Interactive's Profit Performance
In conclusion, both Paradox Interactive's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. After considering all this, we reckon Paradox Interactive's statutory profit probably understates its earnings potential! If you'd like to know more about Paradox Interactive as a business, it's important to be aware of any risks it's facing. For example, we've found that Paradox Interactive has 3 warning signs (1 is concerning!) that deserve your attention before going any further with your analysis.
Our examination of Paradox Interactive has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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