Amos Luzon Development and Energy Group's (TLV:LUZN) Earnings Are Of Questionable Quality

Unsurprisingly, Amos Luzon Development and Energy Group Ltd's (TLV:LUZN) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

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A Closer Look At Amos Luzon Development and Energy Group's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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 September 2025, Amos Luzon Development and Energy Group recorded an accrual ratio of 0.69. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₪1.3b despite its profit of ₪106.6m, mentioned above. We also note that Amos Luzon Development and Energy Group's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₪1.3b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Amos Luzon Development and Energy Group.

Our Take On Amos Luzon Development and Energy Group's Profit Performance

As we have made quite clear, we're a bit worried that Amos Luzon Development and Energy Group didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Amos Luzon Development and Energy Group's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for Amos Luzon Development and Energy Group you should be mindful of and 2 of them can't be ignored.

This note has only looked at a single factor that sheds light on the nature of Amos Luzon Development and Energy Group's 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. 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.