Suny Cellular Communication's (TLV:SNCM) Sluggish Earnings Might Be Just The Beginning Of Its Problems

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

See our latest analysis for Suny Cellular Communication

Zooming In On Suny Cellular Communication'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Suny Cellular Communication has an accrual ratio of 0.37 for the year to December 2023. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₪22.3m, a look at free cash flow indicates it actually burnt through ₪79m in the last year. It's worth noting that Suny Cellular Communication generated positive FCF of ₪52m a year ago, so at least they've done it in the past. Having said that, there is more to the story. 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 Suny Cellular Communication.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by ₪2.2m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Suny Cellular Communication doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Suny Cellular Communication's Profit Performance

Summing up, Suny Cellular Communication received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Suny Cellular Communication's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Suny Cellular Communication, you'd also look into what risks it is currently facing. Case in point: We've spotted 5 warning signs for Suny Cellular Communication you should be mindful of and 3 of these can't be ignored.

Our examination of Suny Cellular Communication has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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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.