Combined Motor Holdings' (JSE:CMH) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern Combined Motor Holdings Limited's (JSE:CMH) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

We've discovered 1 warning sign about Combined Motor Holdings. View them for free.

A Closer Look At Combined Motor Holdings' 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. 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. 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.

Combined Motor Holdings has an accrual ratio of -0.23 for the year to February 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of R715m in the last year, which was a lot more than its statutory profit of R301.5m. Combined Motor Holdings' free cash flow improved over the last year, which is generally good to see.

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 Combined Motor Holdings' Profit Performance

Happily for shareholders, Combined Motor Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Combined Motor Holdings' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 while earnings quality is important, it's equally important to consider the risks facing Combined Motor Holdings at this point in time. While conducting our analysis, we found that Combined Motor Holdings has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Combined Motor Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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 with significant insider holdings 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.