Investors Can Find Comfort In Orian Sh.M's (TLV:ORIN) Earnings Quality

Investors were disappointed with the weak earnings posted by Orian Sh.M. Ltd. (TLV:ORIN ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

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Zooming In On Orian Sh.M's 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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Orian Sh.M has an accrual ratio of -0.12 for the year to March 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₪83m during the period, dwarfing its reported profit of ₪8.71m. Orian Sh.M 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 Orian Sh.M.

Our Take On Orian Sh.M's Profit Performance

As we discussed above, Orian Sh.M has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Orian Sh.M's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 53% per year over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 2 warning signs for Orian Sh.M (1 is significant) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Orian Sh.M's profit. But there are plenty of other ways to inform your opinion of a company. 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 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.