Solid Earnings Reflect PTC Therapeutics' (NASDAQ:PTCT) Strength As A Business

PTC Therapeutics, Inc. (NASDAQ:PTCT) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

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A Closer Look At PTC Therapeutics' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 March 2025, PTC Therapeutics had an accrual ratio of -0.34. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$679m during the period, dwarfing its reported profit of US$594.8m. Given that PTC Therapeutics had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$679m would seem to be a step in the right direction. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for PTC Therapeutics

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.

How Do Unusual Items Influence Profit?

PTC Therapeutics' profit was reduced by unusual items worth US$147m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If PTC Therapeutics doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On PTC Therapeutics' Profit Performance

Considering both PTC Therapeutics' accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. After considering all this, we reckon PTC Therapeutics' statutory profit probably understates its earnings potential! So while earnings quality is important, it's equally important to consider the risks facing PTC Therapeutics at this point in time. For example, PTC Therapeutics has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

After our examination into the nature of PTC Therapeutics' profit, we've come away optimistic for the company. 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.