Despite the good yields ForFarmers NV’s (AMS:FFARM) stock has been quite weak. Our analysis suggests that there are some reasons for hope that investors should be aware of.
Check out our latest analysis for ForFarmers
Comparing cash flow with ForFarmers earnings
Many investors have never heard of the Accrual ratio from cash flowbut it is actually a useful measure of how well a company’s profit is covered by free cash flow (FCF) during a given period. To get the accrual ratio, we first subtract FCF from profit for a period and then divide that number by average funds from operations for the period. This ratio tells us how much of a company’s profit is not covered by free cash flow.
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings would suggest. While it is not a problem to have a positive accrual ratio, which indicates some level of non-cash profits, a high accrual ratio is arguably a bad thing because it indicates that there is no cash flow to match accounting profits. This is because some academic studies have pointed out that high accrual ratios tend to lead to lower earnings or lower earnings growth.
ForFarmers has a provision ratio of -0.11 for the year to June 2024. This means that its free cash flow was quite a bit higher than its statutory profit. That is to say, the company generated free cash flow of €60m during this period, far eclipsing its reported profit of €17.4m. ForFarmers shareholders are no doubt pleased to see that free cash flow has improved over the past twelve months. However, there is more to it than that. The provision ratio reflects, at least in part, the impact of unusual items on statutory profit.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.
How do unusual items affect profits?
ForFarmers’ profit was reduced by €12m worth of unusual items over the last twelve months, which contributed to high cash conversion reflected in the unusual items. This is what you would expect when a company has a non-cash charge reducing accounting profit. While deductions due to unusual items are disappointing to begin with, there is also a silver lining. We’ve looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that’s hardly surprising, given that these items are considered unusual. Therefore, assuming these unusual expenses don’t recur, we expect ForFarmers to generate higher profit next year, all else remaining unchanged.
Our assessment of ForFarmers’ earnings development
When we consider both ForFarmers’ accrual ratio and unusual items, we believe that the statutory profits are unlikely to overstate the company’s underlying earnings power. Taking all of these factors into account, we would say that ForFarmers’ underlying earnings power is at least as good as the statutory numbers suggest. While the quality of earnings is important, it is equally important to consider the risks that ForFarmers currently faces. At Simply Wall St, we have found 2 warning signs for ForFarmers and we think they deserve your attention.
After examining the nature of ForFarmers’ earnings, we are optimistic about the company. However, there are many other ways to form an opinion about a company. For example, many people consider a high return on equity to indicate a favorable business situation, while others like to “follow the money” and look for stocks that insiders are buying. You may want to check this out. free Collection of companies with high return on equity or this list of stocks with high insider ownership.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
