Tiv Taam Holdings 1's (TLV:TTAM) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern Tiv Taam Holdings 1 Ltd.'s (TLV:TTAM) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Tiv Taam Holdings 1

A Closer Look At Tiv Taam Holdings 1'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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.

Tiv Taam Holdings 1 has an accrual ratio of -0.25 for the year to March 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₪108m in the last year, which was a lot more than its statutory profit of ₪37.8m. Tiv Taam Holdings 1'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 Tiv Taam Holdings 1.

Our Take On Tiv Taam Holdings 1's Profit Performance

As we discussed above, Tiv Taam Holdings 1's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Tiv Taam Holdings 1's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. 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. While conducting our analysis, we found that Tiv Taam Holdings 1 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 Tiv Taam Holdings 1's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.