Les Hôtels Baverez's (EPA:ALLHB) Solid Earnings Are Supported By Other Strong Factors

Even though Les Hôtels Baverez S.A.'s (EPA:ALLHB) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for Les Hôtels Baverez

Examining Cashflow Against Les Hôtels Baverez'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Les Hôtels Baverez has an accrual ratio of -0.12 for the year to December 2023. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of €11m in the last year, which was a lot more than its statutory profit of €8.48m. Les Hôtels Baverez's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Les Hôtels Baverez.

Our Take On Les Hôtels Baverez's Profit Performance

As we discussed above, Les Hôtels Baverez has perfectly satisfactory free cash flow relative to profit. Because of this, we think Les Hôtels Baverez's 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 20% in the last year. 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. If you're interested we have a graphic representation of Les Hôtels Baverez's balance sheet.

This note has only looked at a single factor that sheds light on the nature of Les Hôtels Baverez's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.