IEX Group N.V.’s (AMS:IEX) robust earnings report didn’t manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.
Check out our latest analysis for IEX Group
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. 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. The ratio shows us how much a company’s profit exceeds its FCF.
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. 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 June 2024, IEX Group had an accrual ratio of 0.42. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that’s a real negative for future earnings. Indeed, in the last twelve months it reported free cash flow of €1.0m, which is significantly less than its profit of €1.49m. At this point we should mention that IEX Group did manage to increase its free cash flow in the last twelve months
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of IEX Group.
As we discussed above, we think IEX Group’s earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that IEX Group’s underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 45% 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. So if you’d like to dive deeper into this stock, it’s crucial to consider any risks it’s facing. You’d be interested to know, that we found 3 warning signs for IEX Group and you’ll want to know about them.
Today we’ve zoomed in on a single data point to better understand the nature of IEX Group’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.