Despite Bell Equipment Limited’s (JSE:BEL) recent subdued profit figures, investors remained confident as evidenced by the stable stock market performance. This phenomenon might be attributed to certain positive indicators that have appeared beyond the conventional profit data.
It might surprise some investors to learn about the accrual ratio derived from cash flow. This is a highly beneficial metric to assess the extent at which a company’s profit is supported by its free cash flow (FCF). To calculate the accrual ratio, FCF is subtracted from profit for a certain period, and then that number is divided by the average operating assets for that same period.
The accrual ratio is indicative of the extent to which a company’s profit surpasses its FCF. In essence, a negative accrual ratio paints a positive picture as it indicates that the company is generating more free cash flow than what its profit figures might lead to believe.
On the contrary, a positive accrual ratio isn’t inherently problematic to have, representing a degree of non-cash profits. However, an exceedingly high accrual ratio can certainly raise concerns as it suggests that a company’s reported profits don’t align with the cash flow. Drawing on a 2014 research paper by Lewellen and Resutek, companies demonstrating higher accruals generally face diminished future profitability.
Bell Equipment’s accrual ratio settled at -0.29 for the year leading up to June 2025. This reveals that the company’s statutory earnings were far less than its free cash flow, indicating a strong financial standing from a cashflow perspective.
In fact, the company witnessed a free cash flow amounting to R2.2 billion in the preceding year, significantly outstripping its statutory profit of R347.1 million. This serves as an affirmation of the financial health of the company.
The improved free cash flow in the past year is a positive sign for Bell Equipment. This improvement provides further assurance to shareholders about the company’s steady state.
Comfortably, Bell Equipment’s FCF surpassed its statutory profit numbers, offering a robust support to its profitability. With an observation like this, there’s potential that Bell Equipment’s statutory profit might be understating its true earnings capability.
Confirming this hypothesis, the company’s earnings per share (EPS) grew at an annual rate of 9.1% over the previous three years. This consistent growth trend seems to highlight the firm’s promising outlook.
Nevertheless, to attain a comprehensive understanding of the company’s performance, investors should not merely place their focus on the factors discussed. It’s fundamental to delve into other important financial aspects as well.
Ultimately, it is critical to remember that the accrual ratio is merely one tool in an investor’s arsenal. Although useful, it should not be the sole determining factor in any investment decision.
In the end, understanding a company completely requires a multi-faceted approach, where the accrual ratio could play a part. Thus, a prudent investor always considers all information available before reaching any determinations.
All in all, considering Bell Equipment’s strong FCF and steady EPS growth, it seems that the company holds promise for its stakeholders. Coupled with other informative metrics, Bell Equipment’s financial health reveals positive signs for its future.
The post Bell Equipment’s Stable Performance Disguised by Low Profits appeared first on Real News Now.
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