Investors Can Find Comfort In ETGA Group's (TLV:ETGA) Earnings Quality

Soft earnings didn't appear to concern ETGA Group Ltd's (TLV:ETGA) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for ETGA Group

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

ETGA Group has an accrual ratio of -0.13 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₪78m during the period, dwarfing its reported profit of ₪27.5m. ETGA Group's 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 ETGA Group.

Our Take On ETGA Group's Profit Performance

ETGA Group's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think ETGA Group's earnings potential is at least as good as it seems, and maybe even better! And we are pleased to note that EPS is at least heading in the right direction over the last three years. 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. If you'd like to know more about ETGA Group as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 3 warning signs for ETGA Group and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of ETGA Group's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.