11880 Solutions AG's (ETR:TGTA) solid earnings announcement recently didn't do much to the stock price. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.
A Closer Look At 11880 Solutions' 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. 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.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to September 2026, 11880 Solutions recorded an accrual ratio of -0.23. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of €2.0m during the period, dwarfing its reported profit of €1.09m. Notably, 11880 Solutions had negative free cash flow last year, so the €2.0m it produced this year was a welcome improvement. However, we can see that a recent tax benefit, along with unusual items, have impacted its statutory profit, and therefore its accrual ratio.
View our latest analysis for 11880 Solutions
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of 11880 Solutions.
How Do Unusual Items Influence Profit?
11880 Solutions' profit was reduced by unusual items worth €189k in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect 11880 Solutions to produce a higher profit next year, all else being equal.
An Unusual Tax Situation
In addition to the notable accrual ratio, we can see that 11880 Solutions received a tax benefit of €1.0m. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.
Our Take On 11880 Solutions' Profit Performance
In conclusion, both 11880 Solutions' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative, but the presence of a tax benefits may be inflating the numbers in a way that won't persist. Looking at all these factors, we'd say that 11880 Solutions' underlying earnings power is at least as good as the statutory numbers would make it seem. If you want to do dive deeper into 11880 Solutions, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for 11880 Solutions (of which 1 can't be ignored!) you should know about.
After our examination into the nature of 11880 Solutions' profit, we've come away optimistic for the company. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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