We Think You Can Look Beyond Aviation Links' (TLV:AVIA) Lackluster Earnings

Shareholders appeared unconcerned with Aviation Links Ltd's (TLV:AVIA) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Aviation Links

A Closer Look At Aviation Links' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Aviation Links has an accrual ratio of -0.13 for the year to September 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of US$5.2m in the last year, which was a lot more than its statutory profit of US$2.54m. Aviation Links' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

How Do Unusual Items Influence Profit?

Surprisingly, given Aviation Links' accrual ratio implied strong cash conversion, its paper profit was actually boosted by US$454k in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If Aviation Links doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Aviation Links' Profit Performance

In conclusion, Aviation Links' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Aviation Links' profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Aviation Links, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Aviation Links has 1 warning sign and it would be unwise to ignore it.

Our examination of Aviation Links has focussed on certain factors that can make its earnings look better than they are. 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.