We Think TSG IT Advanced Systems' (TLV:TSG) Robust Earnings Are Conservative

TSG IT Advanced Systems Ltd (TLV:TSG) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

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A Closer Look At TSG IT Advanced Systems' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

TSG IT Advanced Systems has an accrual ratio of -0.19 for the year to June 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of ₪51m in the last year, which was a lot more than its statutory profit of ₪15.4m. TSG IT Advanced Systems' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TSG IT Advanced Systems.

Our Take On TSG IT Advanced Systems' Profit Performance

As we discussed above, TSG IT Advanced Systems' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think TSG IT Advanced Systems' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. While earnings are important, another area to consider is the balance sheet. You can see our latest analysis on TSG IT Advanced Systems' balance sheet health here.

This note has only looked at a single factor that sheds light on the nature of TSG IT Advanced Systems' 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. 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.