Ashot Ashkelon Industries' (TLV:ASHO) Performance Is Even Better Than Its Earnings Suggest

When companies post strong earnings, the stock generally performs well, just like Ashot Ashkelon Industries Ltd.'s (TLV:ASHO) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

See our latest analysis for Ashot Ashkelon Industries

Zooming In On Ashot Ashkelon Industries' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2024, Ashot Ashkelon Industries recorded an accrual ratio of -0.20. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₪113m, well over the ₪20.7m it reported in profit. Given that Ashot Ashkelon Industries had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₪113m would seem to be a step in the right direction.

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

Our Take On Ashot Ashkelon Industries' Profit Performance

As we discussed above, Ashot Ashkelon Industries' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Ashot Ashkelon Industries' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. We've done some analysis and you can see our take on Ashot Ashkelon Industries' balance sheet by clicking here.

Today we've zoomed in on a single data point to better understand the nature of Ashot Ashkelon Industries' 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 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.