Some Investors May Be Willing To Look Past AMG HoldingsLtd's (TSE:8891) Soft Earnings

Shareholders appeared unconcerned with AMG Holdings Co.,Ltd.'s (TSE:8891) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Our free stock report includes 2 warning signs investors should be aware of before investing in AMG HoldingsLtd. Read for free now.

A Closer Look At AMG HoldingsLtd's 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'.

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 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.

AMG HoldingsLtd has an accrual ratio of -0.14 for the year to March 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of JP¥4.2b during the period, dwarfing its reported profit of JP¥975.0m. Given that AMG HoldingsLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥4.2b would seem to be a step in the right direction.

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

Our Take On AMG HoldingsLtd's Profit Performance

As we discussed above, AMG HoldingsLtd has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that AMG HoldingsLtd's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 12% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. At Simply Wall St, we found 2 warning signs for AMG HoldingsLtd and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of AMG HoldingsLtd's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.