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We Like The Quality Of JB Hi-Fi's (ASX:JBH) Earnings
Shareholders appeared to be happy with JB Hi-Fi Limited's (ASX:JBH) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.
View our latest analysis for JB Hi-Fi
Zooming In On JB Hi-Fi's Earnings
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. 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. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to December 2021, JB Hi-Fi recorded an accrual ratio of -0.58. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of AU$902m, well over the AU$476.3m it reported in profit. JB Hi-Fi did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.
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 on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. 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 example, we've found that JB Hi-Fi has 2 warning signs (1 makes us a bit uncomfortable!) that deserve your attention before going any further with your analysis.
This note has only looked at a single factor that sheds light on the nature of JB Hi-Fi'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 that insiders are buying.
Valuation is complex, but we're helping make it simple.
Find out whether JB Hi-Fi is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
JB Hi-Fi Limited, together with its subsidiaries, retails home consumer products.
Flawless balance sheet with solid track record and pays a dividend.