Weak Statutory Earnings May Not Tell The Whole Story For Easy Lease Motor Cycle Rental P.S.C (ADX:EASYLEASE)

The subdued market reaction suggests that Easy Lease Motor Cycle Rental P.S.C.'s (ADX:EASYLEASE) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View 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

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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 June 2024, Easy Lease Motor Cycle Rental P.S.C recorded an accrual ratio of 0.38. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of د.إ54m despite its profit of د.إ29.7m, mentioned above. We saw that FCF was د.إ11m a year ago though, so Easy Lease Motor Cycle Rental P.S.C has at least been able to generate positive FCF in the past.

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.

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

As we have made quite clear, we're a bit worried that Easy Lease Motor Cycle Rental P.S.C didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Easy Lease Motor Cycle Rental P.S.C's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. If you want to do dive deeper into Easy Lease Motor Cycle Rental P.S.C, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (1 is potentially serious!) that you ought to be aware of before buying any shares in Easy Lease Motor Cycle Rental P.S.C.

This note has only looked at a single factor that sheds light on the nature of Easy Lease Motor Cycle Rental P.S.C's profit. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com