G
ateway Real Estate AG (ETR:GTY) saw its stock rise after announcing healthy earnings, but there's more to consider beyond the profit numbers.

    A key financial ratio is the accrual ratio, which measures how well a company converts profit into free cash flow (FCF). It subtracts FCF from net profit and divides by average operating assets over that period. A negative accrual ratio indicates a company generates more FCF than its profit suggests, while a high positive ratio may signal future profitability issues.

    Gateway Real Estate recorded an accrual ratio of 0.22 in the twelve months to September 2024, indicating its free cash flow fell short of reported profits. In fact, it had negative free cash flow of €29m despite a profit of €213.7m. This isn't the first time; last year's free cash flow was also negative.

    The accrual ratio partly reflects unusual items boosting statutory profit by €83m in the last year. While higher profit is desirable, significant contributions from unusual items can dampen enthusiasm and make statutory profit a poor guide to underlying earnings power.