We Think Shareholders Should Be Aware Of Some Factors Beyond Knafaim Holdings' (TLV:KNFM) Profit

Knafaim Holdings Ltd. (TLV:KNFM) recently released a strong earnings report, and the market responded by raising the share price. However, we think that shareholders should be aware of some other factors beyond the profit numbers.

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Zooming In On Knafaim 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). 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.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2025, Knafaim Holdings had an accrual ratio of 0.29. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of US$27.3m, a look at free cash flow indicates it actually burnt through US$8.1m in the last year. It's worth noting that Knafaim Holdings generated positive FCF of US$5.7m a year ago, so at least they've done it in the past. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

See our latest analysis for Knafaim Holdings

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

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Knafaim Holdings' profit was boosted by unusual items worth US$19m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that Knafaim Holdings' positive unusual items were quite significant relative to its profit in the year to September 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Knafaim Holdings' Profit Performance

Knafaim Holdings had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Knafaim Holdings' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Knafaim Holdings as a business, it's important to be aware of any risks it's facing. For example, we've found that Knafaim Holdings has 4 warning signs (2 are potentially serious!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.