We Think Torrid Holdings' (NYSE:CURV) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by the solid earnings posted by Torrid Holdings Inc. (NYSE:CURV) recently. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

Check out our latest analysis for Torrid Holdings

Zooming In On Torrid Holdings' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Torrid Holdings has an accrual ratio of -0.48 for the year to November 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of US$51m in the last year, which was a lot more than its statutory profit of US$15.2m. Torrid Holdings' free cash flow improved over the last year, which is generally good to see.

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 Torrid Holdings' Profit Performance

As we discussed above, Torrid Holdings' 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 Torrid Holdings' statutory profit actually understates its earnings potential! And the EPS is up 28% over the last twelve months. 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 Torrid Holdings as a business, it's important to be aware of any risks it's facing. Our analysis shows 4 warning signs for Torrid Holdings (2 don't sit too well with us!) and we strongly recommend you look at them before investing.

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