GreenEnergy & Company Inc.’s (TSE:1436) robust recent earnings didn’t do much to move the stock. However the statutory profit number doesn’t tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for GreenEnergy

A Closer Look At GreenEnergy’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’.

Therefore, it’s actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.

GreenEnergy has an accrual ratio of 0.31 for the year to October 2024. Therefore, we know that it’s free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of JP¥300.0m, a look at free cash flow indicates it actually burnt through JP¥2.2b in the last year. We saw that FCF was JP¥1.1b a year ago though, so GreenEnergy has at least been able to generate positive FCF in the past. One positive for GreenEnergy shareholders is that it’s accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of GreenEnergy.

Our Take On GreenEnergy’s Profit Performance

GreenEnergy didn’t convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that GreenEnergy’s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 6.7% per annum growth in EPS for the last three. 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. If you’d like to know more about GreenEnergy as a business, it’s important to be aware of any risks it’s facing. To help with this, we’ve discovered 4 warning signs (3 shouldn’t be ignored!) that you ought to be aware of before buying any shares in GreenEnergy.

This note has only looked at a single factor that sheds light on the nature of GreenEnergy’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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.