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Investors were disappointed with Grand Banks Yachts Limited's (SGX:G50) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.
Check out our latest analysis for Grand Banks Yachts
Examining Cashflow Against Grand Banks Yachts' 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".
For the year to December 2024, Grand Banks Yachts had an accrual ratio of 0.48. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of S$1.1m, in contrast to the aforementioned profit of S$22.0m. It's worth noting that Grand Banks Yachts generated positive FCF of S$6.9m a year ago, so at least they've done it in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grand Banks Yachts.
Our Take On Grand Banks Yachts' Profit Performance
As we have made quite clear, we're a bit worried that Grand Banks Yachts didn't back up the last year's profit with free cashflow. For this reason, we think that Grand Banks Yachts' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 63% EPS growth in 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 3 warning signs for Grand Banks Yachts (1 shouldn't be ignored!) that we believe deserve your full attention.