Why AzplanningLtd's (TSE:3490) Shaky Earnings Are Just The Beginning Of Its Problems

A lackluster earnings announcement from Azplanning Co.,Ltd. (TSE:3490) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

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Examining Cashflow Against AzplanningLtd's 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

AzplanningLtd has an accrual ratio of 0.38 for the year to February 2025. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of JP¥461.0m, a look at free cash flow indicates it actually burnt through JP¥2.0b in the last year. We also note that AzplanningLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥2.0b.

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

Our Take On AzplanningLtd's Profit Performance

As we have made quite clear, we're a bit worried that AzplanningLtd didn't back up the last year's profit with free cashflow. For this reason, we think that AzplanningLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing AzplanningLtd at this point in time. For instance, we've identified 4 warning signs for AzplanningLtd (2 shouldn't be ignored) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of AzplanningLtd'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.