Why Telematic Interactive Bulgaria EAD's (BUL:TIB) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Telematic Interactive Bulgaria EAD's (BUL:TIB) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Telematic Interactive Bulgaria EAD

A Closer Look At Telematic Interactive Bulgaria EAD'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Telematic Interactive Bulgaria EAD had an accrual ratio of 0.53. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of лв15m during the period, falling well short of its reported profit of лв17.5m. Telematic Interactive Bulgaria EAD shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. The good news for shareholders is that Telematic Interactive Bulgaria EAD's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Telematic Interactive Bulgaria EAD.

Our Take On Telematic Interactive Bulgaria EAD's Profit Performance

As we discussed above, we think Telematic Interactive Bulgaria EAD's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Telematic Interactive Bulgaria EAD's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Telematic Interactive Bulgaria EAD, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Telematic Interactive Bulgaria EAD (including 1 which is potentially serious).

Today we've zoomed in on a single data point to better understand the nature of Telematic Interactive Bulgaria EAD's profit. But there are plenty of other ways to inform your opinion of a company. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.