Conservative accounting of Neto ME Holdings (TLV: NTO) could explain the low profits

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The shareholders seemed indifferent to Neto ME Holdings Ltd (TLV: NTO) lackluster earnings report last week. We have dug a bit and we think the profits are higher than they appear.

Check out our latest analysis for Neto ME Holdings

TASE: NTO Revenue and Revenue History as of December 2, 2021

Review of Cash Flow vs. Earnings of Neto ME Holdings

Many investors have not heard of the cash flow adjustment ratio, but it’s actually a useful measure of the extent to which a company’s profit is supported by Free Cash Flow (FCF) over a given period. To get the accrual ratio, we first subtract FCF from the profit for a period and then divide that number by the average operating assets for the period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.

Therefore, a negative accumulation ratio is positive for the company and a positive accumulation ratio is negative. This is not to say that we should be worried about a positive accumulation ratio, but it should be noted where the accumulation ratio is rather high. To quote a 2014 article by Lewellen and Resutek, “Firms with higher totals tend to be less profitable in the future.”

Neto ME Holdings has an accumulation ratio of -0.12 for the year through September 2021. This implies that it has a good cash conversion and implies that its free cash flow has greatly exceeded its profit from the year. ‘last year. Indeed, over the past twelve months it has reported free cash flow of 228 million euros, well above the 85.5 million euros in profit. Neto ME Holdings free cash flow has improved over the past year which is generally good to see.

To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Neto ME Holdings’ balance sheet.

Our take on Neto ME Holdings earnings performance

As we have seen above, Neto ME Holdings has a perfectly satisfactory free cash flow compared to profit. For this reason, we believe Neto ME Holdings’ earning potential is at least as good as it looks, and maybe even better! And we’re happy to see that EPS is at least on the right track over the past three years. The aim of this article has been to assess how well we can rely on statutory profits to reflect the potential of the business, but there is much more to consider. With that in mind, we wouldn’t consider investing in a stock unless we have a thorough understanding of the risks. For example, we discovered 3 warning signs that you should run your eye to get a better picture of Neto ME Holdings.

Today we zoomed in on a single data point to better understand the nature of Neto ME Holdings earnings. But there is always more to be discovered if you are able to focus your mind on the smallest details. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free a set of companies offering a high return on equity, or that list of stocks that insiders buy.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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