NYSE News Today – Tempur Sealy International’s (NYSE:TPX) Strong Earnings Are Of Good Quality

Even though Tempur Sealy International, Inc. (NYSE:TPX ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.

See our latest analysis for Tempur Sealy International

A Closer Look At Tempur Sealy International’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. 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.

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. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.

For the year to December 2020, Tempur Sealy International had an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of US$544m in the last year, which was a lot more than its statutory profit of US$348.8m. Tempur Sealy International shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Tempur Sealy International’s Profit Performance

Tempur Sealy International’s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Tempur Sealy International’s earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. So while earnings quality is important, it’s equally important to consider the risks facing Tempur Sealy International at this point in time. For example, we’ve discovered 2 warning signs that you should run your eye over to get a better picture of Tempur Sealy International.

Today we’ve zoomed in on a single data point to better understand the nature of Tempur Sealy International’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. 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.
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