We Think Holmes Place International's (TLV:HLMS) Profit Is Only A Baseline For What They Can Achieve

The subdued stock price reaction suggests that Holmes Place International Ltd's (TLV:HLMS) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

View our latest analysis for Holmes Place International

Zooming In On 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. 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 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.

For the year to September 2024, Holmes Place International had an accrual ratio of -0.27. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₪95m during the period, dwarfing its reported profit of ₪45.9m. Over the last year, Holmes Place International's free cash flow remained steady.

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 25% over the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 2 warning signs for Holmes Place International (of which 1 is potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on 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. 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.