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Vertiv Holdings Co's (NYSE:VRT) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.
We've discovered 2 warning signs about Vertiv Holdings Co. View them for free.
Zooming In On Vertiv Holdings Co's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. 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.
Vertiv Holdings Co has an accrual ratio of -0.16 for the year to March 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of US$1.3b during the period, dwarfing its reported profit of US$666.2m. Vertiv Holdings Co 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 Vertiv Holdings Co's Profit Performance
As we discussed above, Vertiv Holdings Co has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Vertiv Holdings Co's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Vertiv Holdings Co at this point in time. Every company has risks, and we've spotted 2 warning signs for Vertiv Holdings Co you should know about.