Medion’s revenues (ETR: MDN) are lower than they appear
Despite strong earnings, the Medion AG (ETR: MDN) the stock hasn’t moved much. Our analysis suggests that shareholders have noticed something worrying about the numbers.
Check out our latest review for Medion
A closer look at the benefits of Medion
As finance nerds already know, the cash flow adjustment ratio is a key metric for assessing how well a business’s free cash flow (FCF) matches its profits. The accrual ratio subtracts the FCF from the profit for a given period and divides the profit by the average operating assets of the company over that period. You can think of the accumulation ratio from cash flow as the âprofit ratio excluding FCFâ.
Therefore, a negative accumulation ratio is positive for the company and a positive accumulation ratio is negative. While an accumulation ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accumulation ratio. To quote a 2014 article by Lewellen and Resutek, “Firms with higher totals tend to be less profitable in the future.”
Medion has an accrual ratio of 0.28 for the year through September 2021. Therefore, we know that its free cash flow was significantly lower than its statutory profit, which raises questions about actual utility. of this profit figure. Even though it reported a profit of 41.0 million euros, a free cash flow examination indicates that it has actually burned 36 million euros in the past year. We also note that Medion’s free cash flow was negative last year as well, so we were able to understand if shareholders were embarrassed by its â¬ 36 million outflow.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Medion’s balance sheet.
Our perspective on Medion’s earnings performance
Medion did not convert much of its earnings to free cash flow last year, which some investors may consider to be rather sub-optimal. For this reason, we believe that Medion’s statutory profits may be better than its underlying profit power. But at least holders can take comfort in the 28% annual growth in EPS for the last three. The aim of this article has been to assess how well we can rely on statutory profits to reflect the potential of the business, but there is much more to consider. With that in mind, we wouldn’t consider investing in a stock unless we have a thorough understanding of the risks. For example, we found out that Medion has 2 warning signs (1 is worrying!) Which deserve your attention before going any further in your analysis.
This memo has considered only one factor that sheds light on the nature of Medion’s profit. But there are plenty of other ways to give your opinion about a business. Some people consider a high return on equity to be a good sign of a quality business. So you might want to see this free a set of companies offering a high return on equity, or that list of stocks that insiders buy.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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