Some May Be Optimistic About Richelieu Hardware's (TSE:RCH) Earnings

Investors were disappointed with the weak earnings posted by Richelieu Hardware Ltd. (TSE:RCH ). Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

See our latest analysis for Richelieu Hardware

Zooming In On Richelieu Hardware'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 November 2023, Richelieu Hardware recorded an accrual ratio of -0.13. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CA$229m, well over the CA$111.5m it reported in profit. Given that Richelieu Hardware had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CA$229m would seem to be a step in the right direction.

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 Richelieu Hardware's Profit Performance

As we discussed above, Richelieu Hardware has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Richelieu Hardware's statutory profit actually understates its earnings potential! And the EPS is up 32% 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Richelieu Hardware, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Richelieu Hardware'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.