The market for B Communications Ltd (TLV:BCOM) was little moving after recently posting weak earnings. Our analysis suggests that while earnings are weak, the company’s fundamentals are strong.
Try this chances and risks within the IL Telecom industry.
Zoom on B Communications earnings
As financial nerds already know, the Accrual rate from the cash flow is an important metric for assessing how well a company’s free cash flow (FCF) matches its earnings. The accrual ratio subtracts the FCF from profit for a given period and divides the result by the company’s average operating assets during that period. You can think of the accrual rate from cash flow as the “non-FCF win rate”.
Consequently, a negative accrual rate is positive for the company and a positive accrual rate is negative. While a reserving rate above zero doesn’t matter, we think it’s worth noting if a company has a relatively high reserving rate. That’s because some academic studies suggest that high accrual rates tend to result in lower earnings or lower earnings growth.
For the year ended September 2022, B Communications had a provision ratio of -0.15. This indicates that free cash flow significantly exceeded statutory profit. In fact, it had free cash flow of ₪1.6 billion last year, which was much more than the statutory profit of ₪127.0 million. B Communications’ free cash flow has improved over the past year, which is generally good to see. However, there is more to the story. We can see that unusual items have impacted the statutory profit and hence the reserve ratio.
Note: We always advise investors to review balance sheet strength. Click here for our B Communications balance sheet analysis.
The Impact of Unusual Items on Profit
B Communications profit was impacted by ₪230M in anomalous items over the trailing twelve months, which helped generate high cash conversion as reflected in the anomalous items. In a scenario where these unusual items include non-cash charges, we would expect a strong reserve rate, and that is what happened in this case. It’s never nice to see unusual things cost the company’s profits, but on the other hand, things could improve sooner rather than later. We looked at thousands of public companies and found that unusual things are very often unique. And that’s hardly a surprise since these line items are considered uncommon. Barring a repeat of this unusual expense at B Communications, all else being equal, we would expect earnings to rise in the coming year.
Our view on B Communications’ earnings development
Considering both B Communications’ provisioning ratio and its unusual items, we believe statutory earnings are unlikely to overstate the company’s underlying profitability. Taking all of these factors together, we’d say that B Communications’ underlying earnings power is at least as good as its legal numbers suggest. If you want to delve deeper into B Communications, you should also look into the risks it currently faces. In conducting our analysis, we found that B Communications did 2 warning signs and it would be unwise to ignore them.
After examining the nature of B Communications’ earnings, we are bullish on the company. But there are many other ways to express your opinion about a company. For example, many people see a high return on equity as an indication of good business conditions, while others like to “follow the money” and look for stocks that insiders are buying. You might want to see this free Collection of companies with high return on equity or this list of stocks that insiders are buying.
The assessment is complex, but we help to simplify it.
find out if B communication may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
Check out the free analysis
Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.