TotalEnergies EP Gabon Société Anonyme’s (EPA:EC) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that TotalEnergies EP Gabon Société Anonyme’s (EPA:EC) recent earnings didn’t contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

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Examining Cashflow Against TotalEnergies EP Gabon Société Anonyme’s 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). 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. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.

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. 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”.

TotalEnergies EP Gabon Société Anonyme has an accrual ratio of 0.30 for the year to December 2025. Therefore, we know that it’s free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of US$46.3m, a look at free cash flow indicates it actually burnt through US$165m in the last year. We saw that FCF was US$251m a year ago though, so TotalEnergies EP Gabon Société Anonyme has at least been able to generate positive FCF in the past. Importantly, we note an unusual tax situation, which we discuss below, has impacted the accruals ratio. This would partially explain why the accrual ratio was so poor. The good news for shareholders is that TotalEnergies EP Gabon Société Anonyme’s accrual ratio was much better last year, so this year’s poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TotalEnergies EP Gabon Société Anonyme.

An Unusual Tax Situation

Moving on from the accrual ratio, we note that TotalEnergies EP Gabon Société Anonyme profited from a tax benefit which contributed US$17m to profit. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it’s great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we’d expect to see its statutory profit levels drop, at least in the absence of strong growth. While we think it’s good that the company has booked a tax benefit, it does mean that there’s every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On TotalEnergies EP Gabon Société Anonyme’s Profit Performance

This year, TotalEnergies EP Gabon Société Anonyme couldn’t match its profit with cashflow. If the tax benefit is not repeated, then profit would drop next year, all else being equal. Considering all this we’d argue TotalEnergies EP Gabon Société Anonyme’s profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. For instance, we’ve identified 3 warning signs for TotalEnergies EP Gabon Société Anonyme (2 are concerning) you should be familiar with.

In this article we’ve looked at a number of factors that can impair the utility of profit numbers, and we’ve come away cautious. 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.