We Think Trace Group Hold's (BUL:T57) Healthy Earnings Might Be Conservative

Shareholders appeared to be happy with Trace Group Hold PLC's (BUL:T57) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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Examining Cashflow Against Trace Group Hold's 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Trace Group Hold has an accrual ratio of 0.20 for the year to September 2025. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of лв14m despite its profit of лв23.9m, mentioned above. We also note that Trace Group Hold's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of лв14m. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Check out our latest analysis for Trace Group Hold

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Trace Group Hold.

How Do Unusual Items Influence Profit?

Unfortunately (in the short term) Trace Group Hold saw its profit reduced by unusual items worth лв8.3m. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Trace Group Hold to produce a higher profit next year, all else being equal.

Our Take On Trace Group Hold's Profit Performance

In conclusion, Trace Group Hold's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, it's hard to tell if Trace Group Hold's profits are a reasonable reflection of its underlying profitability. If you'd like to know more about Trace Group Hold as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Trace Group Hold (including 1 which can't be ignored).

Our examination of Trace Group Hold has focussed on certain factors that can make its earnings look better than they are. 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 with high insider ownership.

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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.