The Strong Earnings Posted By Tethys Petroleum (CVE:TPL) Are A Good Indication Of The Strength Of The Business

Tethys Petroleum Limited (CVE:TPL) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

Check out the opportunities and risks within the CA Oil and Gas industry.

A Closer Look At Tethys Petroleum'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. 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 September 2022, Tethys Petroleum had an accrual ratio of -0.14. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$23m during the period, dwarfing its reported profit of US$18.5m. Given that Tethys Petroleum had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$23m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tethys Petroleum.

Our Take On Tethys Petroleum's Profit Performance

As we discussed above, Tethys Petroleum has perfectly satisfactory free cash flow relative to profit. Because of this, we think Tethys Petroleum's earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. At Simply Wall St, we found 2 warning signs for Tethys Petroleum and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Tethys Petroleum'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 that insiders are buying 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.