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When companies post strong earnings, the stock generally performs well, just like Third Age Health Services Limited's (NZSE:TAH) stock has recently. We did some digging and found some further encouraging factors that investors will like.
View our latest analysis for Third Age Health Services
A Closer Look At Third Age Health Services' Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
For the year to September 2024, Third Age Health Services had an accrual ratio of -0.40. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NZ$3.2m during the period, dwarfing its reported profit of NZ$1.88m. Third Age Health Services shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Third Age Health Services.
Our Take On Third Age Health Services' Profit Performance
As we discussed above, Third Age Health Services' 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 Third Age Health Services' statutory profit actually understates its earnings potential! Furthermore, it has done a great job growing EPS over the 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 Third Age Health Services as a business, it's important to be aware of any risks it's facing. For example - Third Age Health Services has 3 warning signs we think you should be aware of.