Weak Statutory Earnings May Not Tell The Whole Story For Ralco Agencies (TLV:RLCO)

The subdued market reaction suggests that Ralco Agencies Ltd's (TLV:RLCO) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

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A Closer Look At Ralco Agencies' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

For the year to September 2025, Ralco Agencies had an accrual ratio of 0.34. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of ₪26.7m, a look at free cash flow indicates it actually burnt through ₪14m in the last year. It's worth noting that Ralco Agencies generated positive FCF of ₪29m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ralco Agencies.

Our Take On Ralco Agencies' Profit Performance

As we discussed above, we think Ralco Agencies' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Ralco Agencies' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Ralco Agencies at this point in time. For example, Ralco Agencies has 5 warning signs (and 4 which are potentially serious) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Ralco Agencies' 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. 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.