Why Palram Industries (1990)'s (TLV:PLRM) Earnings Are Better Than They Seem

Palram Industries (1990) Ltd (TLV:PLRM) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.

See our latest analysis for Palram Industries (1990)

Zooming In On Palram Industries (1990)'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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Palram Industries (1990) has an accrual ratio of -0.14 for the year to December 2023. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₪286m in the last year, which was a lot more than its statutory profit of ₪164.3m. Given that Palram Industries (1990) had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₪286m 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 Palram Industries (1990).

Our Take On Palram Industries (1990)'s Profit Performance

Palram Industries (1990)'s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Palram Industries (1990)'s statutory profit actually understates its earnings potential! And the EPS is up 6.4% 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. If you want to do dive deeper into Palram Industries (1990), you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for Palram Industries (1990) and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Palram Industries (1990)'s profit. But there are plenty of other ways to inform your opinion of a company. 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.

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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.