Harbour Energy's (LON:HBR) Robust Earnings Are Supported By Other Strong Factors

Harbour Energy plc (LON:HBR) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

View our latest analysis for Harbour Energy

Examining Cashflow Against Harbour Energy'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. 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. 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, Harbour Energy recorded an accrual ratio of -0.32. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of US$970m during the period, dwarfing its reported profit of US$101.1m. Harbour Energy's free cash flow improved over the last year, which is generally good to see.

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 Harbour Energy's Profit Performance

Happily for shareholders, Harbour Energy produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Harbour Energy's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Harbour Energy, you'd also look into what risks it is currently facing. For example - Harbour Energy has 3 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Harbour Energy'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.