Why H & M Hennes & Mauritz's (STO:HM B) Earnings Are Better Than They Seem

H & M Hennes & Mauritz AB (publ) (STO:HM B) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

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Examining Cashflow Against 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to August 2025, H & M Hennes & Mauritz recorded an accrual ratio of -0.22. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr18b during the period, dwarfing its reported profit of kr10.8b. H & M Hennes & Mauritz's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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. Based on this observation, we consider it possible that H & M Hennes & Mauritz's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 23% per year over the last three years. 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 H & M Hennes & Mauritz at this point in time. In terms of investment risks, we've identified 1 warning sign with H & M Hennes & Mauritz, and understanding it should be part of your investment process.

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