Carasso Motors' (TLV:CRSM) Profits Appear To Have Quality Issues

The stock price didn't jump after Carasso Motors Ltd. (TLV:CRSM) posted decent earnings last week. We did some digging and believe investors may be worried about some underlying factors in the report.

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Zooming In On Carasso Motors' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 December 2024, Carasso Motors had an accrual ratio of 0.25. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of ₪1.5b despite its profit of ₪270.9m, mentioned above. We also note that Carasso Motors' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₪1.5b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Carasso Motors .

Our Take On Carasso Motors' Profit Performance

Carasso Motors didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Carasso Motors' statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 34% in the last year. 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 while earnings quality is important, it's equally important to consider the risks facing Carasso Motors at this point in time. Every company has risks, and we've spotted 3 warning signs for Carasso Motors you should know about.

Today we've zoomed in on a single data point to better understand the nature of Carasso Motors' 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 with high insider ownership.

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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.