Sports Toto Berhad's (KLSE:SPTOTO) Soft Earnings Are Actually Better Than They Appear

The market for Sports Toto Berhad's (KLSE:SPTOTO) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Sports Toto Berhad

Examining Cashflow Against Sports Toto Berhad'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.

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".

Sports Toto Berhad has an accrual ratio of -0.11 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of RM444m in the last year, which was a lot more than its statutory profit of RM218.0m. Sports Toto Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Sports Toto Berhad's Profit Performance

Sports Toto Berhad's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Sports Toto Berhad's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 21% annually, over the last three years. 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. If you'd like to know more about Sports Toto Berhad as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Sports Toto Berhad and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Sports Toto Berhad'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. 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 with significant insider holdings to be useful.

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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.