Azkoyen's (BME:AZK) Strong Earnings Are Of Good Quality

Azkoyen, S.A. (BME:AZK) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

Check out our latest analysis for Azkoyen

Examining Cashflow Against Azkoyen's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Azkoyen has an accrual ratio of -0.11 for the year to December 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of €33m in the last year, which was a lot more than its statutory profit of €18.6m. Azkoyen shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Azkoyen.

Our Take On Azkoyen's Profit Performance

As we discussed above, Azkoyen has perfectly satisfactory free cash flow relative to profit. Because of this, we think Azkoyen's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 44% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 1 warning sign for Azkoyen you should know about.

This note has only looked at a single factor that sheds light on the nature of Azkoyen's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.