Amvis Holdings' (TSE:7071) Solid Earnings May Rest On Weak Foundations

The stock price didn't jump after Amvis Holdings, Inc. (TSE:7071) posted decent earnings last week. We think that investors might be worried about some concerning underlying factors.

View our latest analysis for Amvis Holdings

Examining Cashflow Against Amvis Holdings' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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 2024, Amvis Holdings had an accrual ratio of 0.40. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of JP¥8.5b, in contrast to the aforementioned profit of JP¥7.44b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥8.5b, this year, indicates high risk.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Amvis Holdings' Profit Performance

As we discussed above, we think Amvis Holdings' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Amvis Holdings' underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Amvis Holdings, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Amvis Holdings (2 make us uncomfortable) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Amvis Holdings' 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.