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The Trade Desk, Inc. (NASDAQ:TTD) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.
Zooming In On Trade Desk's 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. 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. 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. 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".
Over the twelve months to March 2025, Trade Desk recorded an accrual ratio of -0.32. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$686m during the period, dwarfing its reported profit of US$412.1m. Trade Desk 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 Trade Desk's Profit Performance
As we discussed above, Trade Desk'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 Trade Desk's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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. So while earnings quality is important, it's equally important to consider the risks facing Trade Desk at this point in time. Case in point: We've spotted 1 warning sign for Trade Desk you should be aware of.