We think you can look past Gentrack Group’s (NZSE:GTK) weak earnings

The market was pleased with the company’s latest earnings report Gentrack Group Limited (NZSE:GTK), although earnings numbers were weak. We think investors could also look at some positive factors beyond the earnings numbers.

Check out our latest analysis for Gentrack Group

In high finance, the key metric used to measure how well a company converts reported profits into free cash flow (FCF). demarcation relationship (from cash flow). To get the accrual ratio, we first subtract FCF from a period’s profit and then divide that number by the period’s average operating assets. This ratio tells us how much of a company’s profit is not covered by free cash flow.

This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its profit suggests. While there is no problem with having a positive accrual ratio, which indicates some level of non-cash profits, a high accrual ratio is arguably a bad thing, as it indicates that paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek: “Companies with higher accruals tend to be less profitable in the future.”

Gentrack Group has an accrual ratio of -0.17 for the year ending September 2024. This suggests that their free cash flow significantly exceeds their statutory profit. In fact, the company had free cash flow of NZ$33m last year, which was much more than its statutory profit of NZ$9.55m. Gentrack Group’s free cash flow has improved over the last year, which is generally encouraging.

You may be wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to view an interactive graph depicting future profitability based on their estimates.

As we discussed above, Gentrack Group’s accrual ratio suggests strong profit-to-free cash flow conversion, which is positive for the company. For this reason, we believe that Gentrack Group’s underlying earnings potential is as good, or possibly even better, than its statutory profit suggests! Unfortunately, however, earnings per share have actually declined over the last year. The aim of this article was to assess how well we can rely on statutory earnings to reflect the company’s potential, but there is much more to consider. If you want to delve deeper into Gentrack Group, also take a look at what risks it is currently facing. You would be interested to know what we found 2 warning signs for Gentrack Group and you’ll want to know about these bad boys.

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