The market for Knorr-Bremse AG’s (ETR:KBX) shares didn’t move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.
Our free stock report includes 1 warning sign investors should be aware of before investing in Knorr-Bremse. Read for free now.
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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. The ratio shows us how much a company’s profit exceeds its FCF.
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. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Knorr-Bremse has an accrual ratio of -0.12 for the year to March 2025. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of €831m, well over the €426.0m it reported in profit. Knorr-Bremse’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.
As we discussed above, Knorr-Bremse has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Knorr-Bremse’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. So if you’d like to dive deeper into this stock, it’s crucial to consider any risks it’s facing. While conducting our analysis, we found that Knorr-Bremse has 1 warning sign and it would be unwise to ignore this.
Today we’ve zoomed in on a single data point to better understand the nature of Knorr-Bremse’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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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.