Danel (Adir Yeoshua)'s (TLV:DANE) Earnings Are Growing But Is There More To The Story?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Danel (Adir Yeoshua) (TLV:DANE).

While Danel (Adir Yeoshua) was able to generate revenue of ₪1.82b in the last twelve months, we think its profit result of ₪96.0m was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Danel (Adir Yeoshua)

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Today, we'll discuss Danel (Adir Yeoshua)'s free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Danel (Adir Yeoshua).

A Closer Look At Danel (Adir Yeoshua)'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Danel (Adir Yeoshua) has an accrual ratio of -0.28 for the year to June 2020. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of ₪161m during the period, dwarfing its reported profit of ₪96.0m. Danel (Adir Yeoshua)'s free cash flow improved over the last year, which is generally good to see.

Our Take On Danel (Adir Yeoshua)'s Profit Performance

Happily for shareholders, Danel (Adir Yeoshua) produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Danel (Adir Yeoshua)'s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 41% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - Danel (Adir Yeoshua) has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Danel (Adir Yeoshua)'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. 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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