Singapore Airlines' (SGX:C6L) Robust Earnings Are Supported By Other Strong Factors

The subdued stock price reaction suggests that Singapore Airlines Limited's (SGX:C6L) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

Check out the opportunities and risks within the XX Airlines industry.

Examining Cashflow Against Singapore Airlines' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2022, Singapore Airlines had an accrual ratio of -0.21. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of S$4.9b in the last year, which was a lot more than its statutory profit of S$801.7m. Given that Singapore Airlines had negative free cash flow in the prior corresponding period, the trailing twelve month resul of S$4.9b would seem to be a step in the right direction.

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 Singapore Airlines' Profit Performance

Happily for shareholders, Singapore Airlines produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Singapore Airlines' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Our analysis shows 2 warning signs for Singapore Airlines (1 doesn't sit too well with us!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Singapore Airlines' 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 that insiders are buying 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.