We Think Bonei Hatichon Civil Engineering & Infrastructures' (TLV:BOTI) Robust Earnings Are Conservative

Even though Bonei Hatichon Civil Engineering & Infrastructures Ltd.'s (TLV:BOTI) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Bonei Hatichon Civil Engineering & Infrastructures

Zooming In On Bonei Hatichon Civil Engineering & Infrastructures' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 March 2021, Bonei Hatichon Civil Engineering & Infrastructures recorded an accrual ratio of -0.43. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of ₪143m during the period, dwarfing its reported profit of ₪5.31m. Bonei Hatichon Civil Engineering & Infrastructures shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Bonei Hatichon Civil Engineering & Infrastructures.

Our Take On Bonei Hatichon Civil Engineering & Infrastructures' Profit Performance

Happily for shareholders, Bonei Hatichon Civil Engineering & Infrastructures produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Bonei Hatichon Civil Engineering & Infrastructures' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've found that Bonei Hatichon Civil Engineering & Infrastructures has 2 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Bonei Hatichon Civil Engineering & Infrastructures' 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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