Stock Analysis

There May Be Underlying Issues With The Quality Of S.N.T.G.N. Transgaz's (BVB:TGN) Earnings

BVB:TGN
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Despite posting some strong earnings, the market for S.N.T.G.N. Transgaz S.A.'s (BVB:TGN) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for S.N.T.G.N. Transgaz

earnings-and-revenue-history
BVB:TGN Earnings and Revenue History March 8th 2025
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A Closer Look At S.N.T.G.N. Transgaz's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2024, S.N.T.G.N. Transgaz recorded an accrual ratio of 0.22. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of RON1.1b despite its profit of RON384.7m, mentioned above. It's worth noting that S.N.T.G.N. Transgaz generated positive FCF of RON142m 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 S.N.T.G.N. Transgaz.

Our Take On S.N.T.G.N. Transgaz's Profit Performance

S.N.T.G.N. Transgaz didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that S.N.T.G.N. Transgaz's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of S.N.T.G.N. Transgaz.

This note has only looked at a single factor that sheds light on the nature of S.N.T.G.N. Transgaz's 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.