Is There More To The Story Than Telelink Business Services Group AD's (BUL:TBS) Earnings Growth?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Telelink Business Services Group AD (BUL:TBS).

It's good to see that over the last twelve months Telelink Business Services Group AD made a profit of лв12.2m on revenue of лв126.8m. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Telelink Business Services Group AD

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Telelink Business Services Group AD's cashflow tells us about the quality of its earnings. 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.

A Closer Look At Telelink Business Services Group AD'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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Telelink Business Services Group AD has an accrual ratio of -0.33 for the year to September 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of лв15m, well over the лв12.2m it reported in profit. Telelink Business Services Group AD's free cash flow improved over the last year, which is generally good to see.

Our Take On Telelink Business Services Group AD's Profit Performance

As we discussed above, Telelink Business Services Group AD's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Telelink Business Services Group AD's statutory profit actually understates its earnings potential! 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 Telelink Business Services Group AD, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Telelink Business Services Group AD has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Telelink Business Services Group AD'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.

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This article by Simply Wall St is general in nature. 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.
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