Investors Shouldn't Be Too Comfortable With Grand Harbour Marina p.l.c's (MTSE:GHM) Earnings

Unsurprisingly, Grand Harbour Marina p.l.c's (MTSE:GHM) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

View our latest analysis for Grand Harbour Marina p.l.c

A Closer Look At Grand Harbour Marina p.l.c's 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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2024, Grand Harbour Marina p.l.c recorded an accrual ratio of 0.29. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In fact, it had free cash flow of €1.5m in the last year, which was a lot less than its statutory profit of €6.28m. Notably, Grand Harbour Marina p.l.c had negative free cash flow last year, so the €1.5m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grand Harbour Marina p.l.c.

Our Take On Grand Harbour Marina p.l.c's Profit Performance

Grand Harbour Marina p.l.c 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 Grand Harbour Marina p.l.c's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Grand Harbour Marina p.l.c as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 6 warning signs for Grand Harbour Marina p.l.c (of which 3 make us uncomfortable!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Grand Harbour Marina p.l.c's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.