Easy Lease Motor Cycle Rental P.S.C's (ADX:EASYLEASE) Robust Earnings Might Be Weaker Than You Think

Easy Lease Motor Cycle Rental P.S.C.'s (ADX:EASYLEASE) solid earnings report last week was underwhelming to investors. We did some digging and found some worrying factors that they might be paying attention to.

Check out our latest analysis for Easy Lease Motor Cycle Rental P.S.C

A Closer Look At Easy Lease Motor Cycle Rental P.S.C'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. 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. 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. 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 December 2022, Easy Lease Motor Cycle Rental P.S.C recorded an accrual ratio of 0.44. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of د.إ44.1m, a look at free cash flow indicates it actually burnt through د.إ9.8m in the last year. It's worth noting that Easy Lease Motor Cycle Rental P.S.C generated positive FCF of د.إ7.6m a year ago, so at least they've done it in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Easy Lease Motor Cycle Rental P.S.C.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Easy Lease Motor Cycle Rental P.S.C's profit was boosted by unusual items worth د.إ12m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Easy Lease Motor Cycle Rental P.S.C had a rather significant contribution from unusual items relative to its profit to December 2022. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Easy Lease Motor Cycle Rental P.S.C's Profit Performance

Easy Lease Motor Cycle Rental P.S.C had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Easy Lease Motor Cycle Rental P.S.C'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. Be aware that Easy Lease Motor Cycle Rental P.S.C is showing 2 warning signs in our investment analysis and 1 of those is potentially serious...

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 are plenty of other ways to inform your opinion of a company. 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. 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.