Hadasit Bio-Holdings (TLV:HDST) Strong Profits May Be Masking Some Underlying Issues

Hadasit Bio-Holdings Ltd's (TLV:HDST) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Hadasit Bio-Holdings

A Closer Look At Hadasit Bio-Holdings' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2021, Hadasit Bio-Holdings recorded an accrual ratio of 1.38. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₪2.1m despite its profit of ₪28.4m, mentioned above. We also note that Hadasit Bio-Holdings' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₪2.1m.

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

Our Take On Hadasit Bio-Holdings' Profit Performance

As we have made quite clear, we're a bit worried that Hadasit Bio-Holdings didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Hadasit Bio-Holdings' underlying earnings power is lower than its statutory profit. Sadly, its EPS was down 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Hadasit Bio-Holdings (of which 1 doesn't sit too well with us!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Hadasit Bio-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 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.