The market seemed to be impressed by the solid earnings of adidas AG (ETR:ADS) recently. We have conducted some analysis and found some encouraging factors that we believe shareholders should consider.
Check out our latest analysis for adidas
Adidas’ profits in detail
As finance nerds already know, Accrual ratio from cash flow is an important metric for assessing how well a company’s free cash flow (FCF) matches its earnings. The accrual ratio subtracts FCF from earnings for a given period and divides the result by the company’s average funds from operations for that period. You could think of the accrual ratio of cash flow as the “non-FCF profit ratio.”
Consequently, a negative accrual ratio is positive for the company, and a positive accrual ratio is negative. This is not to say that we should be concerned about a positive accrual ratio, but it is worth noting when the accrual ratio is quite high. This is because some academic studies have pointed out that high accrual ratios tend to lead to lower profit or lower profit growth.
adidas has an accrual ratio of -0.30 for the year to June 2024. This means that the company has very good cash conversion and that its profit last year actually significantly underestimates its free cash flow. In fact, the company had free cash flow of €2.4 billion last year, which was much higher than its statutory profit of €196.0 million. Given adidas’ negative free cash flow in the corresponding period last year, its trailing twelve-month result of €2.4 billion seems to be a step in the right direction.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.
Our assessment of Adidas’ earnings development
As we discussed above, Adidas’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we believe Adidas’ underlying earnings potential is as good, or possibly even better, than its statutory profit suggests! And one can definitely take the fact that the company made a profit this year despite losses last year as a positive. Ultimately, it’s important to consider more than just the factors mentioned above if you want to properly understand the company. Ultimately, this article has formed an opinion based on historical data. However, it can also be helpful to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates, which you can view here.
Today we’ve focused on a single data point to better understand the nature of Adidas’ profit. But there’s always more to discover if you can focus on the small details. For example, many people consider a high return on equity to be an indicator of a favorable business situation, while others like to “follow the money” and look for stocks that insiders are buying. Although this may require a little research, you may find that this free Collection of companies with high return on equity or this list of stocks with significant insider holdings may prove useful.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
