Integrated Diagnostics Holdings’ (LON:IDHC) Problems Go Beyond Weak Profit

A lackluster earnings announcement from Integrated Diagnostics Holdings plc (LON:IDHC) last week didn’t sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Our analysis indicates that IDHC is potentially undervalued!

LSE:IDHC Earnings and Revenue History November 25th 2022

A Closer Look At Integrated Diagnostics Holdings’ Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual rate. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. You could think of the accrual ratio from cash flow as the ‘non-FCF profit ratio’.

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. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2022, Integrated Diagnostics Holdings had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Indeed, in the last twelve months it reported free cash flow of ج.م417m, which is significantly less than its profit of ج.م716.0m. Integrated Diagnostics Holdings’ 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. However, that’s not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. One positive for Integrated Diagnostics Holdings shareholders is that it’s accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Unfortunately (in the short term) Integrated Diagnostics Holdings saw its profit reduced by unusual items worth ج.م136m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it’s not great to see in combination with an uninspiring accrual ratio. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analyzed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that’s exactly what the accounting terminology implies. If Integrated Diagnostics Holdings doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.

Our Take On Integrated Diagnostics Holdings’ Profit Performance

In conclusion, Integrated Diagnostics Holdings’ accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, we think it’s very unlikely that Integrated Diagnostics Holdings’ statutory profits make it seem much weaker than it is. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 3 warning signs for Integrated Diagnostics Holdings (2 are a bit unpleasant!) that we believe deserve your full attention.

Our examination of Integrated Diagnostics Holdings has focused on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focusing 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Valuation is complex, but we’re helping make it simple.

Find out whether Integrated Diagnostics Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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