Investors signalled that they were pleased with RH PetroGas Limited's (SGX:T13) most recent earnings report. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

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Examining Cashflow Against RH PetroGas' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2025, RH PetroGas recorded an accrual ratio of -0.52. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of US$20m, well over the US$14.2m it reported in profit. Given that RH PetroGas had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$20m 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 RH PetroGas' Profit Performance

Happily for shareholders, RH PetroGas produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that RH PetroGas' statutory profit actually understates its earnings potential! Furthermore, it has done a great job growing EPS over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing RH PetroGas at this point in time. For example, we've found that RH PetroGas has 2 warning signs (1 shouldn't be ignored!) that deserve your attention before going any further with your analysis.