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Investors signalled that they were pleased with Eleco plc's (LON:ELCO) most recent earnings report. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.
Zooming In On Eleco's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company's profit exceeds its FCF.
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. 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.
Eleco has an accrual ratio of -0.14 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of UK£5.6m during the period, dwarfing its reported profit of UK£3.33m. Eleco shareholders are no doubt pleased that free cash flow improved over the last twelve months.
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 Eleco's Profit Performance
As we discussed above, Eleco has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Eleco's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 22% 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. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.