Golf & Co Group's (TLV:GOLF) Earnings Offer More Than Meets The Eye

Despite posting healthy earnings, Golf & Co Group Ltd's (TLV:GOLF ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

Check out our latest analysis for Golf & Co Group

Zooming In On Golf & Co Group's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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.

Over the twelve months to September 2024, Golf & Co Group recorded an accrual ratio of -0.77. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₪169m during the period, dwarfing its reported profit of ₪24.5m. Golf & Co Group shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Golf & Co Group.

The Impact Of Unusual Items On Profit

Golf & Co Group's profit was reduced by unusual items worth ₪23m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Golf & Co Group doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Golf & Co Group's Profit Performance

Considering both Golf & Co Group's accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. After considering all this, we reckon Golf & Co Group's statutory profit probably understates its earnings potential! So while earnings quality is important, it's equally important to consider the risks facing Golf & Co Group at this point in time. Our analysis shows 3 warning signs for Golf & Co Group (1 is potentially serious!) and we strongly recommend you look at them before investing.

Our examination of Golf & Co Group has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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.