Shareholders appeared to be happy with TeamViewer SE's (ETR:TMV) solid earnings report last week. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

Check out our latest analysis for TeamViewer

Examining Cashflow Against TeamViewer's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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".

For the year to June 2024, TeamViewer had an accrual ratio of -0.25. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of €232m during the period, dwarfing its reported profit of €105.7m. TeamViewer did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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 TeamViewer's Profit Performance

As we discussed above, TeamViewer's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think TeamViewer's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 62% annually, 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. If you'd like to know more about TeamViewer as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that TeamViewer has 1 warning sign and it would be unwise to ignore it.