G
ateway Real Estate AG (ETR:GTY) recently reported decent earnings, but shareholders seem unimpressed. We suspect they might be concerned about some underlying details that our analysis uncovered. To understand the company's performance better, let's take a closer look at its accrual ratio.

    The accrual ratio is a key metric in finance that measures how well a company converts reported profits into free cash flow (FCF). A negative accrual ratio is generally a good sign, indicating that the company generates more FCF than its profit suggests. However, an accrual ratio above zero can be a cause for concern, as some studies suggest it may lead to lower profit or reduced growth.

    For Gateway Real Estate, the accrual ratio was 0.26 in the year to December 2023. This means its free cash flow fell short of covering its statutory profit, with an outflow of €102m despite a profit of €165.9m. The negative free cash flow last year and this year's cash burn of €102m might raise concerns about high risk.

    However, there's more to the story. The accrual ratio is influenced by unusual items that boosted statutory profit by €43m in the last twelve months. While higher profits are generally positive, we'd prefer sustainable earnings. Unusual items often have a one-off impact and can make statutory profit an unreliable guide to underlying earnings power.

    In conclusion, Gateway Real Estate's profit was boosted by unusual items, but its free cash flow couldn't match its paper profit. We think that a closer look at the company's performance is necessary, considering potential risks. At Simply Wall St, we found 4 warning signs for Gateway Real Estate and believe they deserve attention.

    Our examination of Gateway Real Estate has highlighted factors that can make its earnings appear better than they are. While there's always more to discover by focusing on details, other investors might consider a high return on equity or insider buying as indicators of favorable business economics or stock potential.