The Strong Earnings Posted By Tongcheng Travel Holdings (HKG:780) Are A Good Indication Of The Strength Of The Business

Investors were underwhelmed by the solid earnings posted by Tongcheng Travel Holdings Limited (HKG:780) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

See our latest analysis for Tongcheng Travel Holdings

Examining Cashflow Against Tongcheng Travel Holdings’ Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from 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 cashflow.

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. While having an accrual ratio above zero is of little concern, we do think it’s worth noting when a company has a relatively high accrual ratio. 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 December 2023, Tongcheng Travel Holdings had an accrual ratio of -0.14. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥3.2b in the last year, which was a lot more than its statutory profit of CN¥1.55b. Given that Tongcheng Travel Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥3.2b would seem to be a step in the right direction.

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 Tongcheng Travel Holdings’ Profit Performance

Tongcheng Travel Holdings’ accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Tongcheng Travel Holdings’ earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. While conducting our analysis, we found that Tongcheng Travel Holdings has 1 warning sign and it would be unwise to ignore it.

Today we’ve zoomed in on a single data point to better understand the nature of Tongcheng Travel Holdings’ profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.