Shareholders appeared unconcerned with DATA MODUL Aktiengesellschaft, Produktion und Vertrieb von elektronischen Systemen's (ETR:DAM) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for DATA MODUL Produktion und Vertrieb von elektronischen Systemen

A Closer Look At DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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.

DATA MODUL Produktion und Vertrieb von elektronischen Systemen has an accrual ratio of -0.18 for the year to June 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of €36m in the last year, which was a lot more than its statutory profit of €11.0m. DATA MODUL Produktion und Vertrieb von elektronischen Systemen shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Profit Performance

As we discussed above, DATA MODUL Produktion und Vertrieb von elektronischen Systemen's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think DATA MODUL Produktion und Vertrieb von elektronischen Systemen's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 37% annually, 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 while earnings quality is important, it's equally important to consider the risks facing DATA MODUL Produktion und Vertrieb von elektronischen Systemen at this point in time. While conducting our analysis, we found that DATA MODUL Produktion und Vertrieb von elektronischen Systemen has 3 warning signs and it would be unwise to ignore them.