There Are Some Reasons To Suggest That Anlon Technology Solutions' (NSE:ANLON) Earnings Are A Poor Reflection Of Profitability

Shareholders didn't seem to be thrilled with Anlon Technology Solutions Limited's (NSE:ANLON) recent earnings report, despite healthy profit numbers. We think that they might be concerned about some underlying details that our analysis found.

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A Closer Look At Anlon Technology Solutions' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Anlon Technology Solutions has an accrual ratio of 0.48 for the year to September 2025. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹163m despite its profit of ₹93.6m, mentioned above. We also note that Anlon Technology Solutions' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹163m. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Anlon Technology Solutions.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Anlon Technology Solutions increased the number of shares on issue by 12% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Anlon Technology Solutions' historical EPS growth by clicking on this link.

A Look At The Impact Of Anlon Technology Solutions' Dilution On Its Earnings Per Share (EPS)

As you can see above, Anlon Technology Solutions has been growing its net income over the last few years, with an annualized gain of 171% over three years. In comparison, earnings per share only gained 72% over the same period. And at a glance the 93% gain in profit over the last year impresses. On the other hand, earnings per share are only up 73% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Anlon Technology Solutions can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Anlon Technology Solutions' Profit Performance

As it turns out, Anlon Technology Solutions couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Anlon Technology Solutions' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Anlon Technology Solutions, you'd also look into what risks it is currently facing. For example, we've found that Anlon Technology Solutions has 2 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Our examination of Anlon Technology Solutions has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.