Terminal X Online Ltd. (TLV:TRX) Last week’s earnings announcement was disappointing for investors, despite the decent earnings numbers. We did some research and believe they are unnecessarily pessimistic.
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Zoom in on Terminal X Online revenue
An important financial metric that measures how well a company converts its profit into free cash flow (FCF) is the Delimitation ratio. To get the accrual ratio, we first subtract FCF from profit for a period and then divide that number by the average funds from operations for the period. You can think of the accrual ratio from cash flow as the “non-FCF profit ratio.”
Consequently, a negative accrual ratio is positive for the company, and a positive accrual ratio is negative. This is not to say that we should be concerned about a positive accrual ratio, but it is worth noting when the accrual ratio is quite high. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accruals tend to be less profitable in the future.”
Terminal X Online has an accrual ratio of -0.58 for the year to June 2024. That suggests its free cash flow significantly exceeded its statutory profit. In fact, over the last twelve months, it reported free cash flow of ₪99m, significantly more than the ₪9.54m it reported as profit. Notably, Terminal X Online had negative free cash flow last year, so the ₪99m it generated this year was a welcome improvement. There’s more to the story, though. The accrual ratio reflects, at least in part, the impact of unusual items on statutory profit.
Note: We always recommend investors check balance sheet strength. Click here to access our balance sheet analysis of Terminal X Online.
The impact of unusual items on profit
While the provision ratio could be a good sign, we also note that Terminal X Online’s profit was boosted by ₪2.1m worth of unusual items over the last twelve months. While it’s always nice to have a higher profit, sometimes a large contribution from unusual items dampens our enthusiasm. When we ran the numbers of thousands of listed companies, we found that a boost from unusual items in a given year is often not next year. Given the name, this is hardly surprising. If Terminal X Online does not repeat this contribution, all other things being equal, we would expect a decline in profits in the current year.
Our assessment of Terminal X Online’s profit development
Terminal X Online’s earnings have been boosted by unusual items, suggesting they may not be sustainable. Nevertheless, the accrual ratio still suggests solid cash conversion, which is promising. Based on these factors, we believe Terminal X Online’s earnings are a fairly conservative indicator of underlying profitability. While earnings are important, another area to consider is the balance sheet. If you’re interested, we have a graphical representation of Terminal X Online’s balance sheet.
In this article, we’ve looked at a number of factors that can affect the usefulness of earnings numbers as a guide to a company. However, there are many other ways to form an opinion about a company. For example, many people view a high return on equity as an indication of a favorable business situation, while others like to “follow the money” and look for stocks that insiders are buying. Although this may require a little research, you may find free Collection of companies with high return on equity or this list of stocks with significant insider holdings may prove useful.
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