El-Mor Electric Installation & Services (1986)'s (TLV:ELMR) Shareholders May Want To Dig Deeper Than Statutory Profit

El-Mor Electric Installation & Services (1986) Ltd.'s (TLV:ELMR) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for El-Mor Electric Installation & Services (1986)

Examining Cashflow Against El-Mor Electric Installation & Services (1986)'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2021, El-Mor Electric Installation & Services (1986) had an accrual ratio of 0.24. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of ₪1.6m despite its profit of ₪25.7m, mentioned above. It's worth noting that El-Mor Electric Installation & Services (1986) generated positive FCF of ₪8.8m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of El-Mor Electric Installation & Services (1986).

Our Take On El-Mor Electric Installation & Services (1986)'s Profit Performance

El-Mor Electric Installation & Services (1986) didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that El-Mor Electric Installation & Services (1986)'s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 66% per annum growth in EPS for the last three. 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. If you'd like to know more about El-Mor Electric Installation & Services (1986) as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with El-Mor Electric Installation & Services (1986) (including 1 which is concerning).

Today we've zoomed in on a single data point to better understand the nature of El-Mor Electric Installation & Services (1986)'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.
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