Grand Banks Yachts Limited’s (SGX:G50) robust earnings report didn’t manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
View our latest analysis for Grand Banks Yachts
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. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.
Grand Banks Yachts has an accrual ratio of 0.41 for the year to June 2024. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that’s a real negative for future earnings. To wit, it produced free cash flow of S$4.3m during the period, falling well short of its reported profit of S$21.4m. Grand Banks Yachts’ free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grand Banks Yachts.
As we discussed above, we think Grand Banks Yachts’ earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Grand Banks Yachts’ statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you’d like to know more about Grand Banks Yachts as a business, it’s important to be aware of any risks it’s facing. For example, Grand Banks Yachts has 3 warning signs (and 1 which is potentially serious) we think you should know about.
Today we’ve zoomed in on a single data point to better understand the nature of Grand Banks Yachts’ profit. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.