Some Investors May Be Willing To Look Past A10 Networks' (NYSE:ATEN) Soft Earnings

Soft earnings didn't appear to concern A10 Networks, Inc.'s (NYSE:ATEN) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for A10 Networks

A Closer Look At A10 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. 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. 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.

A10 Networks has an accrual ratio of -0.31 for the year to December 2022. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$55m in the last year, which was a lot more than its statutory profit of US$46.9m. A10 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 A10 Networks' Profit Performance

As we discussed above, A10 Networks' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that A10 Networks' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the 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. If you want to do dive deeper into A10 Networks, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for A10 Networks you should know about.

Today we've zoomed in on a single data point to better understand the nature of A10 Networks' 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 that insiders are buying 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.