Train Alliance's (STO:TRAIN B) Soft Earnings Don't Show The Whole Picture

Shareholders appeared unconcerned with Train Alliance AB (publ)'s (STO:TRAIN B) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Train Alliance

A Closer Look At Train Alliance'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2024, Train Alliance had an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of kr199m during the period, dwarfing its reported profit of kr28.1m. Notably, Train Alliance had negative free cash flow last year, so the kr199m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Train Alliance.

Our Take On Train Alliance's Profit Performance

Train Alliance's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Train Alliance's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 36% per year 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 Train Alliance as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Train Alliance, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Train Alliance'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.