Investors were disappointed by Torex Gold Resources Inc.'s (TSE:TXG ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

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A Closer Look At Torex Gold Resources' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Torex Gold Resources has an accrual ratio of 0.21 for the year to March 2025. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of US$130.5m, a look at free cash flow indicates it actually burnt through US$199m in the last year. We also note that Torex Gold Resources' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$199m.

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 Torex Gold Resources' Profit Performance

Torex Gold Resources didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Torex Gold Resources' true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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 Torex Gold Resources, you'd also look into what risks it is currently facing. For example, Torex Gold Resources has 2 warning signs (and 1 which is concerning) we think you should know about.

Story Continues

This note has only looked at a single factor that sheds light on the nature of Torex Gold Resources' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.