Weak Statutory Earnings May Not Tell The Whole Story For Procter & Gamble Hygiene and Health Care (NSE:PGHH)

Procter & Gamble Hygiene and Health Care Limited's (NSE:PGHH) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for Procter & Gamble Hygiene and Health Care

Zooming In On Procter & Gamble Hygiene and Health Care's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

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".

Procter & Gamble Hygiene and Health Care has an accrual ratio of 0.73 for the year to December 2024. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of ₹5.3b in the last year, which was a lot less than its statutory profit of ₹7.16b. Procter & Gamble Hygiene and Health Care shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Procter & Gamble Hygiene and Health Care's Profit Performance

As we discussed above, we think Procter & Gamble Hygiene and Health Care's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Procter & Gamble Hygiene and Health Care's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 24% per annum growth in EPS for the last three. 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 while earnings quality is important, it's equally important to consider the risks facing Procter & Gamble Hygiene and Health Care at this point in time. Case in point: We've spotted 2 warning signs for Procter & Gamble Hygiene and Health Care you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Procter & Gamble Hygiene and Health Care'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. 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.