The strong earnings reported by Tongcheng Travel Holdings (HKG:780) are a good indication of the strength of the business

Investors were not impressed with the solid profits posted by Tongcheng Travel Holdings Limited (HKG:780) recently. We did some analysis and found some reassuring factors behind the earnings numbers.

See our latest analysis for Tongcheng Travel Holdings

Examining Tongcheng Travel Holdings’ Cash Flow vs. Earnings

An important financial ratio used to measure how well a company converts its profit into free cash flow (FCF) is the accumulation rate. To obtain the accrual ratio, we first subtract the FCF from the profit for a period and then divide that number by the average operating assets for the period. This ratio tells us how much of a company’s profit is not backed 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 would suggest. While having an accrual ratio above zero is of little concern, we think it’s worth noting when a company has a relatively high accrual ratio. This is because some academic studies have suggested that high accrual ratios tend to lead to lower profits or lower earnings growth.

In the year to December 2023, Tongcheng Travel Holdings had an accrual ratio of -0.14. Therefore, its statutory income was significantly lower than its free cash flow. In fact, it had free cash flow of CN¥3.2b last year, which was much more than its statutory profit of CN¥1.55b. Given that Tongcheng Travel Holdings had negative free cash flow in the previous corresponding period, the trailing twelve month result of CN¥3.2b appears to be a step in the right direction.

This may leave you 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 your estimates.

Our view on Tongcheng Travel Holdings’ earnings performance

Tongcheng Travel Holdings’ accrual ratio is solid and indicates strong free cash flow, as we discussed above. Because of this, we believe Tongcheng Travel Holdings’ earnings potential is at least as good as it looks, and maybe even better! And one can definitely find a positive aspect in the fact that it made a profit this year despite losing money last year. Of course, we’ve only scratched the surface when it comes to analyzing your earnings; one can also consider margins, growth forecast and return on investment, among other factors. Keep in mind that when it comes to analyzing a stock it is important to note the risks involved. When conducting our analysis, we discovered that Tongcheng Travel Holdings 1 warning sign and it would be unwise to ignore it.

Today we zoom in on a single data point to better understand the nature of Tongcheng Travel Holdings’ profit. But there are many other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free collection of companies with high return on equity or this list of stocks that insiders are buying.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.