There May Be Reason For Hope In Avi-Tech Holdings' (SGX:1R6) Disappointing Earnings

Investors were disappointed with the weak earnings posted by Avi-Tech Holdings Limited (SGX:1R6 ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

See our latest analysis for Avi-Tech Holdings

A Closer Look At Avi-Tech 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Avi-Tech Holdings has an accrual ratio of -0.31 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of S$8.0m during the period, dwarfing its reported profit of S$2.81m. Avi-Tech Holdings 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 Avi-Tech Holdings.

Our Take On Avi-Tech Holdings' Profit Performance

Happily for shareholders, Avi-Tech Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Avi-Tech Holdings' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 3 warning signs we've spotted with Avi-Tech Holdings (including 1 which makes us a bit uncomfortable).

This note has only looked at a single factor that sheds light on the nature of Avi-Tech Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.