Sports Toto Berhad’s (KLSE:SPTOTO) earnings announcement last week didn’t impress shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

Check out our latest analysis for Sports Toto Berhad

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. The ratio shows us how much a company’s profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Sports Toto Berhad has an accrual ratio of -0.12 for the year to September 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of RM432m in the last year, which was a lot more than its statutory profit of RM199.1m. Given that Sports Toto Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM432m 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.

Sports Toto Berhad’s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Sports Toto Berhad’s earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company’s potential, but there is plenty more to consider. If you want to do dive deeper into Sports Toto Berhad, you’d also look into what risks it is currently facing. In terms of investment risks, we’ve identified 2 warning signs with Sports Toto Berhad, and understanding them should be part of your investment process.

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