Addictive Learning Technology's (NSE:LAWSIKHO) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for Addictive Learning Technology Limited's (NSE:LAWSIKHO) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

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A Closer Look At Addictive Learning Technology'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. 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. 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. 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.

Over the twelve months to March 2025, Addictive Learning Technology recorded an accrual ratio of 0.72. 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 ₹233m despite its profit of ₹107.0m, mentioned above. We also note that Addictive Learning Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹233m.

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

Our Take On Addictive Learning Technology's Profit Performance

As we have made quite clear, we're a bit worried that Addictive Learning Technology didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Addictive Learning Technology's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 13% EPS growth in the last year. 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 Addictive Learning Technology at this point in time. Case in point: We've spotted 2 warning signs for Addictive Learning Technology you should be mindful of and 1 of these bad boys is potentially serious.

This note has only looked at a single factor that sheds light on the nature of Addictive Learning Technology'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. 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.