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Investors signalled that they were pleased with Nemetschek SE's (ETR:NEM) most recent earnings report. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.
Examining Cashflow Against Nemetschek's 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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.
Nemetschek has an accrual ratio of -0.21 for the year to March 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of €350m in the last year, which was a lot more than its statutory profit of €177.8m. Nemetschek's free cash flow improved over the last year, which is generally good to see.
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 Nemetschek's Profit Performance
As we discussed above, Nemetschek's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Nemetschek's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 20% annually, over the last three years. 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. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.