Investors Can Find Comfort In Shagrir Group Vehicle Services' (TLV:SHGR) Earnings Quality

The market was pleased with the recent earnings report from Shagrir Group Vehicle Services Ltd (TLV:SHGR), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Shagrir Group Vehicle Services

Examining Cashflow Against Shagrir Group Vehicle Services' 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

For the year to December 2023, Shagrir Group Vehicle Services had an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₪49m in the last year, which was a lot more than its statutory profit of ₪8.47m. Given that Shagrir Group Vehicle Services had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₪49m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shagrir Group Vehicle Services.

Our Take On Shagrir Group Vehicle Services' Profit Performance

As we discussed above, Shagrir Group Vehicle Services has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Shagrir Group Vehicle Services' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Shagrir Group Vehicle Services is showing 3 warning signs in our investment analysis and 2 of those shouldn't be ignored...

Today we've zoomed in on a single data point to better understand the nature of Shagrir Group Vehicle Services' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.