There May Be Underlying Issues With The Quality Of IMCO Industries' (TLV:IMCO) Earnings

Unsurprisingly, IMCO Industries Ltd.'s (TLV:IMCO) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

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A Closer Look At IMCO Industries' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

IMCO Industries has an accrual ratio of 0.40 for the year to December 2024. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₪39m despite its profit of ₪24.9m, mentioned above. We saw that FCF was ₪19m a year ago though, so IMCO Industries has at least been able to generate positive FCF in the past. The good news for shareholders is that IMCO Industries' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of IMCO Industries .

Our Take On IMCO Industries' Profit Performance

As we have made quite clear, we're a bit worried that IMCO Industries didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that IMCO Industries' underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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'd like to know more about IMCO Industries as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 4 warning signs for IMCO Industries you should be mindful of and 2 of them can't be ignored.

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