Shareholders Can Be Confident That Holmes Place International's (TLV:HLMS) Earnings Are High Quality

When companies post strong earnings, the stock generally performs well, just like Holmes Place International Ltd's (TLV:HLMS) stock has recently. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for Holmes Place International

A Closer Look At Holmes Place International's 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Holmes Place International has an accrual ratio of -0.36 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₪92m during the period, dwarfing its reported profit of ₪40.1m. Holmes Place International 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 Holmes Place International.

Our Take On Holmes Place International's Profit Performance

As we discussed above, Holmes Place International's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Holmes Place International's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 20% over the last twelve months. 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. If you want to do dive deeper into Holmes Place International, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Holmes Place International you should know about.

Today we've zoomed in on a single data point to better understand the nature of Holmes Place International's 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. 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. 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.