Shareholders Can Be Confident That TotalEnergies EP Gabon Société Anonyme's (EPA:EC) Earnings Are High Quality

The subdued stock price reaction suggests that TotalEnergies EP Gabon Société Anonyme's (EPA:EC) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

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Zooming In On TotalEnergies EP Gabon Société Anonyme's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

TotalEnergies EP Gabon Société Anonyme has an accrual ratio of -0.19 for the year to December 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$251m in the last year, which was a lot more than its statutory profit of US$91.2m. TotalEnergies EP Gabon Société Anonyme's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TotalEnergies EP Gabon Société Anonyme.

Our Take On TotalEnergies EP Gabon Société Anonyme's Profit Performance

Happily for shareholders, TotalEnergies EP Gabon Société Anonyme produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think TotalEnergies EP Gabon Société Anonyme's 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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that TotalEnergies EP Gabon Société Anonyme has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of TotalEnergies EP Gabon Société Anonyme'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.