Shareholders Will Be Pleased With The Quality of H&K's (EPA:MLHK) Earnings

H&K AG's (EPA:MLHK) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

We've discovered 1 warning sign about H&K. View them for free.

A Closer Look At H&K's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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 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. 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 2024, H&K had an accrual ratio of -0.30. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of €78m in the last year, which was a lot more than its statutory profit of €27.0m. Notably, H&K had negative free cash flow last year, so the €78m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of H&K.

Our Take On H&K's Profit Performance

As we discussed above, H&K's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think H&K's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 29% over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that H&K has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of H&K'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 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.