Shareholders Will Be Pleased With The Quality of Diplomat Holdings' (TLV:DIPL) Earnings

Diplomat Holdings Ltd (TLV:DIPL) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Diplomat Holdings

Examining Cashflow Against Diplomat Holdings' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Diplomat Holdings has an accrual ratio of -0.11 for the year to June 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of ₪228m in the last year, which was a lot more than its statutory profit of ₪99.7m. Diplomat Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Diplomat Holdings' Profit Performance

As we discussed above, Diplomat Holdings has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Diplomat Holdings' statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 56% in the last year. 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 Diplomat Holdings as a business, it's important to be aware of any risks it's facing. For example - Diplomat Holdings has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Diplomat Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.