We Think Naphtha Israel Petroleum's (TLV:NFTA) Robust Earnings Are Conservative

The subdued stock price reaction suggests that Naphtha Israel Petroleum Corp. Ltd.'s (TLV:NFTA) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Naphtha Israel Petroleum

Zooming In On Naphtha Israel 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. 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.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Naphtha Israel Petroleum has an accrual ratio of -0.12 for the year to March 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₪758m in the last year, which was a lot more than its statutory profit of ₪303.9m. Naphtha Israel Petroleum shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Naphtha Israel Petroleum's Profit Performance

As we discussed above, Naphtha Israel Petroleum has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Naphtha Israel Petroleum's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 66% per year over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Naphtha Israel Petroleum (including 1 which shouldn't be ignored).

Today we've zoomed in on a single data point to better understand the nature of Naphtha Israel Petroleum's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.