There May Be Reason For Hope In Ludan Engineering's (TLV:LUDN) Disappointing Earnings

The market for Ludan Engineering Co. Ltd's (TLV:LUDN) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for Ludan Engineering

Examining Cashflow Against Ludan Engineering'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. 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.

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. 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".

For the year to June 2024, Ludan Engineering had an accrual ratio of -0.30. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₪67m in the last year, which was a lot more than its statutory profit of ₪26.7m. Ludan Engineering's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Ludan Engineering's Profit Performance

Happily for shareholders, Ludan Engineering produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Ludan Engineering's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 39% 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. If you'd like to know more about Ludan Engineering as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Ludan Engineering and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Ludan Engineering'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.

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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.