There May Be Reason For Hope In Allsec Technologies' (NSE:ALLSEC) Disappointing Earnings

Allsec Technologies Limited's (NSE:ALLSEC) recent soft profit numbers didn't appear to worry shareholders. However, we think the company is showing some signs that things are more promising than they seem.

See our latest analysis for Allsec Technologies

Examining Cashflow Against Allsec Technologies' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2021, Allsec Technologies had an accrual ratio of -0.61. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₹650m during the period, dwarfing its reported profit of ₹276.3m. Allsec Technologies shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Allsec Technologies' Profit Performance

Happily for shareholders, Allsec Technologies produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Allsec Technologies' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Allsec Technologies, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Allsec Technologies (1 is potentially serious) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Allsec Technologies' 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. 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 that insiders are buying to be useful.

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.

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