Vertiv Holdings Co's (NYSE:VRT) Earnings May Just Be The Starting Point

Vertiv Holdings Co (NYSE:VRT) recently posted some strong earnings, and the market responded positively. We have done some analysis, and we found several positive factors beyond the profit numbers.

Check out our latest analysis for Vertiv Holdings Co

Zooming In On Vertiv Holdings Co'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

Vertiv Holdings Co has an accrual ratio of -0.11 for the year to March 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of US$855m, well over the US$404.0m it reported in profit. Given that Vertiv Holdings Co had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$855m would seem to be a step in the right direction.

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 Vertiv Holdings Co's Profit Performance

As we discussed above, Vertiv Holdings Co has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Vertiv Holdings Co's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. 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. If you want to do dive deeper into Vertiv Holdings Co, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Vertiv Holdings Co, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Vertiv Holdings Co'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 that insiders are buying 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.