Concerns over Koninklijke BAM Groep’s (AMS:BAMNB) results.

The share price did not increase after BAM Group nv (AMS:BAMNB) posted decent earnings last week. Our analysis shows there are some concerning factors in the earnings that investors may want to be cautious about.

See our latest analysis for Koninklijke BAM Groep

A closer look at Koninklijke BAM Groep’s profits

Many investors have not heard of cash flow growth ratebut it’s actually a useful measure of how well a company’s earnings are supported by free cash flow (FCF) over a given period. To get the accretion ratio, we first subtract FCF from earnings for the period, then divide that number by average operating assets for the period. You can think of the accretion ratio from cash flow as the “non-FCF earnings ratio.”

This means that a negative accretion ratio is a good thing, because it shows that the company is generating more free cash flow than its earnings would suggest. While having an accretion ratio above zero is nothing to worry about, we think it’s worth paying attention to when a company has a relatively high accretion ratio. To quote a 2014 paper by Lewellen and Resutek, “companies with higher accretions tend to be less profitable in the future.”

In the year to June 2024, Koninklijke BAM Groep had a growth ratio of 0.59. This is fundamentally bad news for future profitability. Namely, the company did not generate a shred of free cash flow during this time. In fact, over the past year negative free cash flow of EUR 59 million, as opposed to the aforementioned profit of EUR 169.7 million. Given the negative free cash flow last year, we imagine that some shareholders may wonder whether this year’s cash burn of EUR 59 million does not indicate a high level of risk.

This may leave you wondering what the analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart showing future profitability, based on their estimates.

Our perspective on the performance of Koninklijke BAM Groep

As we discussed above, we believe that Koninklijke BAM Groep’s earnings were not supported by free cash flow, which may be a concern for some investors. As a result, we believe that it may be the case that Koninklijke BAM Groep’s underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the past three years has been very impressive. Of course, we’ve only just scratched the surface when it comes to analyzing its earnings; you can also consider margins, projected growth and ROI, among other factors. Remember, when it comes to analyzing stocks, it’s worth paying attention to the risks involved. Our analysis shows 2 warning signs for Koninklijke BAM Groep (You can’t ignore this!) and we strongly recommend that you read up on them before investing.

The story continues

This note looks at just one factor that sheds light on the nature of Koninklijke BAM Groep’s profits. But there’s always more to discover if you can focus your mind on the details. For example, many people consider a high return on equity to be an indicator of favorable business economics, while others like to “follow the money” and look for stocks that insiders are buying. While it may take a bit of research on your part, you can find that free a list of companies with high return on equity or a list of stocks in which insiders own shares may be useful.

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This Simply Wall St article is for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. Our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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