Shareholders In Hall of Fame Resort & Entertainment (NASDAQ:HOFV) Should Look Beyond Earnings For The Full Story

Despite posting strong earnings, Hall of Fame Resort & Entertainment Company's (NASDAQ:HOFV) stock didn't move much over the last week. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

View our latest analysis for Hall of Fame Resort & Entertainment

Zooming In On Hall of Fame Resort & Entertainment'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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2022, Hall of Fame Resort & Entertainment recorded an accrual ratio of 0.42. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of US$84m, in contrast to the aforementioned profit of US$24.9m. We also note that Hall of Fame Resort & Entertainment's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$84m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings. One positive for Hall of Fame Resort & Entertainment shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Hall of Fame Resort & Entertainment issued 19% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Hall of Fame Resort & Entertainment's EPS by clicking here.

A Look At The Impact Of Hall of Fame Resort & Entertainment's Dilution on Its Earnings Per Share (EPS).

Hall of Fame Resort & Entertainment was losing money three years ago. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Hall of Fame Resort & Entertainment's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Hall of Fame Resort & Entertainment's Profit Performance

In conclusion, Hall of Fame Resort & Entertainment has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). Considering all this we'd argue Hall of Fame Resort & Entertainment's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Hall of Fame Resort & Entertainment as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 5 warning signs (2 shouldn't be ignored!) that you ought to be aware of before buying any shares in Hall of Fame Resort & Entertainment.

Our examination of Hall of Fame Resort & Entertainment has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.