In This Article:
The market was pleased with the recent earnings report from Green Cross Health Limited (NZSE:GXH), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.
See our latest analysis for Green Cross Health
Zooming In On Green Cross Health'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to September 2024, Green Cross Health recorded an accrual ratio of -0.20. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NZ$46m during the period, dwarfing its reported profit of NZ$12.1m. Green Cross Health's free cash flow improved over the last year, which is generally good to see.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Green Cross Health.
Our Take On Green Cross Health's Profit Performance
Happily for shareholders, Green Cross Health produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Green Cross Health's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Green Cross Health at this point in time. Case in point: We've spotted 4 warning signs for Green Cross Health you should be mindful of and 1 of these doesn't sit too well with us.