Tandem Diabetes Care's (NASDAQ:TNDM) Robust Earnings Are Supported By Other Strong Factors

By
Simply Wall St
Published
August 10, 2021
NasdaqGM:TNDM
Source: Shutterstock

The subdued stock price reaction suggests that Tandem Diabetes Care, Inc.'s (NASDAQ:TNDM) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for Tandem Diabetes Care

earnings-and-revenue-history
NasdaqGM:TNDM Earnings and Revenue History August 11th 2021

A Closer Look At Tandem Diabetes Care'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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".

Tandem Diabetes Care has an accrual ratio of -0.93 for the year to June 2021. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of US$62m, well over the US$6.56m it reported in profit. Tandem Diabetes Care 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 Tandem Diabetes Care's Profit Performance

As we discussed above, Tandem Diabetes Care's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Tandem Diabetes Care's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite 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 Tandem Diabetes Care as a business, it's important to be aware of any risks it's facing. For example, we've found that Tandem Diabetes Care has 4 warning signs (1 is concerning!) 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 Tandem Diabetes Care'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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