Mayfield Group Holdings' (ASX:MYG) Solid Earnings Have Been Accounted For Conservatively

Investors signalled that they were pleased with Mayfield Group Holdings Limited's (ASX:MYG) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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A Closer Look At Mayfield Group Holdings' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Mayfield Group Holdings has an accrual ratio of -0.11 for the year to June 2025. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of AU$8.8m in the last year, which was a lot more than its statutory profit of AU$6.76m. Mayfield Group Holdings did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Mayfield Group Holdings.

Our Take On Mayfield Group Holdings' Profit Performance

As we discussed above, Mayfield Group Holdings has perfectly satisfactory free cash flow relative to profit. Because of this, we think Mayfield Group Holdings' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 28% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 2 warning signs for Mayfield Group Holdings and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Mayfield Group Holdings' 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.