The market was pleased with the recent earnings report from JB Hi-Fi Limited (ASX:JBH), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.
See our latest analysis for JB Hi-Fi
Zooming In On JB Hi-Fi's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to December 2023, JB Hi-Fi had an accrual ratio of -0.17. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of AU$639m during the period, dwarfing its reported profit of AU$459.0m. JB Hi-Fi shareholders are no doubt pleased that free cash flow improved over the last twelve months.
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.
Our Take On JB Hi-Fi's Profit Performance
Happily for shareholders, JB Hi-Fi produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think JB Hi-Fi's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 7.4% annually, over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 2 warning signs for JB Hi-Fi (1 doesn't sit too well with us) you should be familiar with.
Today we've zoomed in on a single data point to better understand the nature of JB Hi-Fi's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.
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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.
About ASX:JBH
Flawless balance sheet average dividend payer.
