We Think You Can Look Beyond Aran Research & Development (1982)'s (TLV:ARAN) Lackluster Earnings

Shareholders appeared unconcerned with Aran Research & Development (1982) Ltd.'s (TLV:ARAN) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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A Closer Look At Aran Research & Development (1982)'s Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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".

Aran Research & Development (1982) has an accrual ratio of -0.22 for the year to December 2024. 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 ₪35m, well over the ₪6.82m it reported in profit. Aran Research & Development (1982)'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 Aran Research & Development (1982).

Our Take On Aran Research & Development (1982)'s Profit Performance

Happily for shareholders, Aran Research & Development (1982) produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Aran Research & Development (1982)'s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in 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. So while earnings quality is important, it's equally important to consider the risks facing Aran Research & Development (1982) at this point in time. Case in point: We've spotted 2 warning signs for Aran Research & Development (1982) you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Aran Research & Development (1982)'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.