Shareholders Can Be Confident That Victory Supermarket Chain's (TLV:VCTR) Earnings Are High Quality

When companies post strong earnings, the stock generally performs well, just like Victory Supermarket Chain Ltd's (TLV:VCTR) stock has recently. Our analysis found some more factors that we think are good for shareholders.

View our latest analysis for Victory Supermarket Chain

Zooming In On Victory Supermarket Chain'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Victory Supermarket Chain has an accrual ratio of -0.34 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₪164m in the last year, which was a lot more than its statutory profit of ₪46.5m. Victory Supermarket Chain's year-on-year free cash flow was as flat as two-day-old fizzy drink.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Victory Supermarket Chain.

Our Take On Victory Supermarket Chain's Profit Performance

As we discussed above, Victory Supermarket Chain'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 Victory Supermarket Chain's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 26% in the last year. 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. If you're interested we have a graphic representation of Victory Supermarket Chain's balance sheet.

Today we've zoomed in on a single data point to better understand the nature of Victory Supermarket Chain'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. 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.