When companies post strong earnings, the stock generally performs well, just like Manhattan Associates, Inc.'s (NASDAQ:MANH) stock has recently. Our analysis found some more factors that we think are good for shareholders.

Examining Cashflow Against Manhattan Associates' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2023, Manhattan Associates recorded an accrual ratio of -14.63. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$241m during the period, dwarfing its reported profit of US$176.6m. Manhattan Associates 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 Manhattan Associates' Profit Performance

As we discussed above, Manhattan Associates' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Manhattan Associates' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Manhattan Associates as a business, it's important to be aware of any risks it's facing. For example - Manhattan Associates has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Manhattan Associates' 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.

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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.