The market shrugged off ING-GRAD d.d.'s (ZGSE:IG) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.
Zooming In On ING-GRAD d.d's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
ING-GRAD d.d has an accrual ratio of 1.63 for the year to September 2026. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of €12m, in contrast to the aforementioned profit of €23.7m. We saw that FCF was €17m a year ago though, so ING-GRAD d.d has at least been able to generate positive FCF in the past.
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.
Our Take On ING-GRAD d.d's Profit Performance
As we have made quite clear, we're a bit worried that ING-GRAD d.d didn't back up the last year's profit with free cashflow. For this reason, we think that ING-GRAD d.d's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 54% EPS growth in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing ING-GRAD d.d at this point in time. Case in point: We've spotted 2 warning signs for ING-GRAD d.d you should be mindful of and 1 of them can't be ignored.
This note has only looked at a single factor that sheds light on the nature of ING-GRAD d.d's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.
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