Investors were underwhelmed by the solid earnings posted by Superior Group of Companies, Inc. (NASDAQ:SGC) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Superior Group of Companies

Examining Cashflow Against Superior Group of Companies' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to June 2024, Superior Group of Companies had an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$54m during the period, dwarfing its reported profit of US$11.2m. Superior Group of Companies 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 Superior Group of Companies' Profit Performance

As we discussed above, Superior Group of Companies has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Superior Group of Companies' statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Superior Group of Companies you should know about.