Shareholders Will Be Pleased With The Quality of Palo Alto Networks' (NASDAQ:PANW) Earnings

When companies post strong earnings, the stock generally performs well, just like Palo Alto Networks, Inc.'s (NASDAQ:PANW) stock has recently. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for Palo Alto Networks

Examining Cashflow Against Palo Alto Networks' 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. 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'.

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.

For the year to January 2023, Palo Alto Networks had an accrual ratio of -3.51. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of US$2.7b in the last year, which was a lot more than its statutory profit of US$34.3m. Palo Alto Networks' free cash flow improved over the last year, which is generally good to see.

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 Palo Alto Networks' Profit Performance

Happily for shareholders, Palo Alto Networks produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Palo Alto Networks' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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 Palo Alto Networks at this point in time. While conducting our analysis, we found that Palo Alto Networks has 3 warning signs and it would be unwise to ignore these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Palo Alto Networks' 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 that insiders are buying.

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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.