Conservative accounting from My Food Bag Group (NZSE: MFB) could explain low income

The shareholders seemed indifferent to My Food Bag Group Limited (NZSE: MFB) lackluster earnings report last week. We believe the weaker numbers may be offset by some positive underlying factors.

Discover our latest analysis for My Food Bag Group

NZSE: MFB Revenue and Revenue History November 27, 2021

Focus on the income of my food bag group

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. Simply put, this ratio subtracts FCF from net income and divides that number by the company’s average operating assets over that period. You can think of the accumulation ratio from cash flow as the “profit ratio excluding FCF”.

Therefore, a negative accumulation ratio is positive for the company and a positive accumulation ratio is negative. While having an accumulation ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accumulation ratio. Notably, some academic evidence suggests that a high accrual ratio is a bad sign for short-term profits, in general.

For the year ending September 2021, My Food Bag Group had an accrual ratio of -0.29. This implies that he has a very good cash conversion and that his profits from last year significantly underestimate his free cash flow. In fact, he had NZ $ 24 million free cash flow last year, which was way more than his statutory profit of NZ $ 4.30 million. The shareholders of My Food Bag Group are undoubtedly satisfied with the improvement in free cash flow over the past twelve months.

This might make you wonder what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our perspective on the benefits of My Food Bag Group

Fortunately for shareholders, My Food Bag Group generated ample free cash flow to support its statutory profit figures. For this reason, we believe that the underlying profit potential of My Food Bag Group is as good, if not better, than the statutory profit suggests! Unfortunately, its earnings per share have actually declined over the past year. 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. So while the quality of the benefits is important, it is just as important to take into account the risks that My Food Bag Group is currently facing. Concrete example: we have spotted 2 warning signs for My Food Bag Group you must be aware.

This memo has considered only one factor that informs the nature of My Food Bag Group’s 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.

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 shares 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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