H & M Hennes & Mauritz's (STO:HM B) Solid Earnings Have Been Accounted For Conservatively

The market seemed underwhelmed by the solid earnings posted by H & M Hennes & Mauritz AB (publ) (STO:HM B) recently. Our analysis suggests that there are some reasons for hope that investors should be aware of.

View our latest analysis for H & M Hennes & Mauritz

Zooming In On H & M Hennes & Mauritz'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to August 2024, H & M Hennes & Mauritz had an accrual ratio of -0.39. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of kr24b during the period, dwarfing its reported profit of kr10.1b. Over the last year, H & M Hennes & Mauritz's free cash flow remained steady.

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 H & M Hennes & Mauritz's Profit Performance

Happily for shareholders, H & M Hennes & Mauritz produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think H & M Hennes & Mauritz's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 17% 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that H & M Hennes & Mauritz has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of H & M Hennes & Mauritz'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.