We Think Golf & Co Group's (TLV:GOLF) Statutory Profit Might Understate Its Earnings Potential

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Golf & Co Group (TLV:GOLF).

While Golf & Co Group was able to generate revenue of ₪869.4m in the last twelve months, we think its profit result of ₪6.48m was more important. Even though revenue has remained steady over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

See our latest analysis for Golf & Co Group

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what Golf & Co Group's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of 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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2020, Golf & Co Group had an accrual ratio of -0.74. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₪159m in the last year, which was a lot more than its statutory profit of ₪6.48m. Golf & Co Group's free cash flow improved over the last year, which is generally good to see.

Our Take On Golf & Co Group's Profit Performance

Happily for shareholders, Golf & Co Group produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Golf & Co Group's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 20% in the last year. 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. You'd be interested to know, that we found 2 warning signs for Golf & Co Group and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Golf & Co Group'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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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