Hamama Meir Trading (1996)'s (TLV:HMAM) Solid Earnings Have Been Accounted For Conservatively

Investors signalled that they were pleased with Hamama Meir Trading (1996) Ltd.'s (TLV:HMAM) most recent earnings report. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

Examining Cashflow Against Hamama Meir Trading (1996)'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Hamama Meir Trading (1996) has an accrual ratio of -0.21 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₪27m in the last year, which was a lot more than its statutory profit of ₪4.43m. Hamama Meir Trading (1996) did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hamama Meir Trading (1996).

Our Take On Hamama Meir Trading (1996)'s Profit Performance

As we discussed above, Hamama Meir Trading (1996)'s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Hamama Meir Trading (1996)'s statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 43% in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Hamama Meir Trading (1996) at this point in time. You'd be interested to know, that we found 1 warning sign for Hamama Meir Trading (1996) and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of Hamama Meir Trading (1996)'s 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. 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 with significant insider holdings 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.