Heidrick & Struggles International's (NASDAQ:HSII) Conservative Accounting Might Explain Soft Earnings

Simply Wall St · 05/13 10:35

Heidrick & Struggles International, Inc.'s (NASDAQ:HSII) stock was strong despite it releasing a soft earnings report last week. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Heidrick & Struggles International

NasdaqGS:HSII Earnings and Revenue History May 13th 2024

A Closer Look At Heidrick & Struggles International's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 March 2024, Heidrick & Struggles International had an accrual ratio of -0.18. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$91m during the period, dwarfing its reported profit of US$52.9m. Heidrick & Struggles International shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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.

Our Take On Heidrick & Struggles International's Profit Performance

Happily for shareholders, Heidrick & Struggles International produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Heidrick & Struggles International's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Heidrick & Struggles International has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Heidrick & Struggles International's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.