Investors signalled that they were pleased with Aztech Global Ltd.'s (SGX:8AZ) most recent earnings report. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.
View our latest analysis for Aztech Global
SGX:8AZ Earnings and Revenue History November 10th 2022Examining Cashflow Against Aztech Global'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Aztech Global has an accrual ratio of -0.20 for the year to September 2022. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of S$104m in the last year, which was a lot more than its statutory profit of S$90.6m. Aztech Global 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 Aztech Global's Profit Performance
As we discussed above, Aztech Global's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Aztech Global's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 15% in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Aztech Global at this point in time. You'd be interested to know, that we found 1 warning sign for Aztech Global and you'll want to know about it.
Today we've zoomed in on a single data point to better understand the nature of Aztech Global'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. 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.