Additional Considerations Required While Assessing Rotem Shani Entrepreneurship and Investment's (TLV:RTSN) Strong Earnings

Rotem Shani Entrepreneurship and Investment Ltd.'s (TLV:RTSN) stock was strong after they recently reported robust earnings. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

View our latest analysis for Rotem Shani Entrepreneurship and Investment

Zooming In On Rotem Shani Entrepreneurship and Investment's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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. 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.

Over the twelve months to September 2024, Rotem Shani Entrepreneurship and Investment recorded an accrual ratio of 0.46. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₪85.2m, a look at free cash flow indicates it actually burnt through ₪110m in the last year. We also note that Rotem Shani Entrepreneurship and Investment's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₪110m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rotem Shani Entrepreneurship and Investment.

Our Take On Rotem Shani Entrepreneurship and Investment's Profit Performance

As we have made quite clear, we're a bit worried that Rotem Shani Entrepreneurship and Investment didn't back up the last year's profit with free cashflow. For this reason, we think that Rotem Shani Entrepreneurship and Investment's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 3 warning signs for Rotem Shani Entrepreneurship and Investment (2 don't sit too well with us!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Rotem Shani Entrepreneurship and Investment'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.