The (TSE:TNZ) shares rose after releasing a solid earnings report. While the headlines were strong, we found some fundamental issues when we looked at the factors that impacted the results.
Check out our latest analysis for Tenaz Energy
Looking at Tenaz Energy’s cash flow versus earnings
An important financial metric that measures how well a company converts its profit into free cash flow (FCF) is the Delimitation ratioTo 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. The ratio tells us how much a company’s profit exceeds its FCF.
Consequently, a negative accrual ratio is positive for the company, while a positive accrual ratio is negative. While a positive accrual ratio is not a problem and indicates a certain amount of non-cash profits, a high accrual ratio is arguably bad as it indicates that there is no cash flow to match accounting profits. This is because some academic studies have pointed out that high accrual ratios tend to lead to lower profits or lower profit growth.
For the twelve months to June 2024, Tenaz Energy recorded an accrual ratio of 0.83. That doesn’t usually bode well for future profitability. And in fact, the company generated no free cash flow at all during that period. Although it reported a profit of CA$25.2 million, a look at its free cash flow shows that it actually burned through CA$24 million last year. We also note that Tenaz Energy’s free cash flow was actually negative last year, so we could understand if shareholders were upset about the CA$24 million outflow. That’s not all there is to consider, though. We can see that unusual items affected statutory profit, and therefore the accrual ratio.
You may be wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability based on their estimates.
The impact of unusual items on profit
Given the accrual ratio, it’s not too surprising that Tenaz Energy’s earnings were boosted by CA$15 million worth of unusual items over the last twelve months. While higher earnings are always nice, sometimes a large contribution from unusual items dampens our enthusiasm. When we analyzed the vast majority of publicly traded companies globally, we found that significant unusual items are often not repeated. And that’s to be expected, since these increases are described as “unusual.” Tenaz Energy had a pretty significant contribution from unusual items relative to its earnings through June 2024. Therefore, we can expect the unusual items to make its statutory profit significantly stronger than it would otherwise be.
Our assessment of Tenaz Energy’s earnings development
To sum up, Tenaz Energy got a nice profit boost from unusual items, but couldn’t get its accounting profit in line with free cash flow. Upon closer inspection, the above factors give us the strong impression that Tenaz Energy’s underlying earnings power is not as good as it might appear based on its statutory profit figures. If you want to learn more about Tenaz Energy as a company, it’s important to be aware of all the risks it faces. Case in point: We discovered 3 warning signs for Tenaz Energy You should be aware.
Our research into Tenaz Energy has focused on certain factors that can make earnings look better than they are. For this reason, we are a little skeptical. But there are many other ways to form an opinion about a company. Some people consider a high return on equity to be a good sign of a high-quality company. Although this may require a little research, you may find that 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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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
