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Despite posting some strong earnings, the market for Azeus Systems Holdings Ltd.'s (SGX:BBW) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
Check out our latest analysis for Azeus Systems Holdings
Examining Cashflow Against Azeus Systems Holdings' 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to September 2024, Azeus Systems Holdings recorded an accrual ratio of 0.46. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of HK$97m during the period, falling well short of its reported profit of HK$106.5m. At this point we should mention that Azeus Systems Holdings did manage to increase its free cash flow in the last twelve months
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Azeus Systems Holdings.
Our Take On Azeus Systems Holdings' Profit Performance
As we have made quite clear, we're a bit worried that Azeus Systems Holdings didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Azeus Systems Holdings' underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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'd like to know more about Azeus Systems Holdings as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 2 warning signs (1 is concerning!) that you ought to be aware of before buying any shares in Azeus Systems Holdings.