TalkMed Group Limited's (SGX:5G3) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for TalkMed Group

Zooming In On TalkMed Group's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

TalkMed Group has an accrual ratio of -0.33 for the year to December 2022. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of S$33m in the last year, which was a lot more than its statutory profit of S$30.5m. TalkMed Group's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TalkMed Group.

Our Take On TalkMed Group's Profit Performance

Happily for shareholders, TalkMed Group produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that TalkMed Group's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 21% in 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 want to do dive deeper into TalkMed Group, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for TalkMed Group you should know about.

This note has only looked at a single factor that sheds light on the nature of TalkMed Group's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.