TeleChoice International's (SGX:T41) Earnings Are Weaker Than They Seem

Last week's profit announcement from TeleChoice International Limited (SGX:T41) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

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Examining Cashflow Against TeleChoice International'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. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

TeleChoice International has an accrual ratio of 0.72 for the year to December 2024. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of S$14m, in contrast to the aforementioned profit of S$4.18m. We saw that FCF was S$11m a year ago though, so TeleChoice International has at least been able to generate positive FCF in the past. The good news for shareholders is that TeleChoice International's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On TeleChoice International's Profit Performance

As we discussed above, we think TeleChoice International's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that TeleChoice International's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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 TeleChoice International as a business, it's important to be aware of any risks it's facing. For example, we've found that TeleChoice International has 4 warning signs (2 are significant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of TeleChoice International's profit. But there are plenty of other ways to inform your opinion of a company. 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.