Investors were disappointed with the solid results of Alarm.com Holdings, Inc. (NASDAQ:ALRM) recently. According to our analysis, investors should be optimistic as the strong earnings rest on a solid foundation.
Check out our latest analysis for Alarm.com Holdings
Looking at Alarm.com Holdings’ cash flow versus earnings
An important financial metric that measures how well a company converts its profit into free cash flow (FCF) is the Delimitation ratio. Simply put, this ratio subtracts FCF from net income and divides that number by the company’s average funds from operations during that period. You can think of the accrual ratio from cash flow as a “non-FCF profit ratio.”
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings would suggest. This is not to say that we should be concerned about a positive accrual ratio, but it is worth noting when the accrual ratio is quite high. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accruals tend to be less profitable in the future.”
For the twelve months to June 2024, Alarm.com Holdings recorded an accrual ratio of -0.10. This means that its free cash flow was quite a bit higher than its statutory profit. In fact, the company had free cash flow of US$165m over the last year, which was significantly higher than its statutory profit of US$107.9m. Alarm.com Holdings shareholders are no doubt pleased to see that free cash flow has improved over the past twelve months.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.
Our assessment of Alarm.com Holdings’ earnings development
Alarm.com Holdings’ accrual ratio is solid and indicates strong free cash flow, as we discussed above. For this reason, we believe Alarm.com Holdings’ earnings potential is at least as good as it seems, and maybe even better! And what’s more, earnings per share have grown 31% per year over the past three years. Of course, we’ve only scratched the surface when analyzing earnings; one might also consider margins, forecast growth and return on capital, among other things. Ultimately, this article has formed an opinion based on historical data. However, it can also be good to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates, which you can see here.
Today we’ve focused on a single data point to better understand the nature of Alarm.com Holdings’ profit. But there’s always more to discover if you’re able to dig deeper. Some people consider a high return on equity to be a good sign of a quality company, so you might want to check it out here. free Collection of companies with high return on equity or this list of stocks with high insider ownership.
Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
