Strong earnings from Ainsworth Game Technology (ASX:AGI) are good quality

The muted stock price reaction suggests that Ainsworth Game Technology Limited (ASX:AGI) Strong earnings offered no surprises. Our analysis suggests investors may be missing out on some promising details.

Check out our latest analysis for Ainsworth Game Technology

ASX: AGI Earnings and Earnings History March 2, 2022

Focus on the profits of Ainsworth Game Technology

As finance nerds already know, the cash flow equalization ratio is a key metric for assessing how well a company’s free cash flow (FCF) matches its earnings. To get the strike ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. This ratio tells us how much of a company’s profit is not supported by free cash flow.

This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings suggest. While it’s fine to have a positive accrual ratio, indicating some level of non-monetary benefits, a high accrual ratio is arguably a bad thing, as it indicates that the earnings on paper do not match the cash flow. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”

In the twelve months to December 2021, Ainsworth Game Technology recorded a accrual ratio of -0.14. This implies that it has a good cash conversion and that its free cash flow far exceeded its earnings last year. Indeed, over the past twelve months it has reported free cash flow of A$45 million, well above the A$5.74 million it reported as profit. Notably, Ainsworth Game Technology had negative free cash flow last year, so the A$45 million it produced this year was a welcome improvement. That said, there is more to the story. The adjustment rate reflects the impact of unusual items on the statutory profit, at least in part.

This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.

The impact of unusual items on earnings

Ainsworth Game Technology’s profit was reduced by unusual items worth A$29 million over the last twelve months, helping it generate high cash conversion, as evidenced by its items unusual. This is what you would expect to see when a company has a non-monetary charge reducing paper profits. It’s never nice to see unusual items cost the company profit, but on the bright side, things might improve sooner rather than later. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And that’s no surprise given that these line items are considered unusual. In the twelve months to December 2021, Ainsworth Game Technology had a large outlay of unusual items. Accordingly, we can assume that the unusual items made its statutory profit significantly lower than it would otherwise be.

Our view on Ainsworth Game Technology’s earnings performance

In conclusion, Ainsworth Game Technology’s accrual ratio and its unusual items suggest that its statutory earnings are likely to be reasonably conservative. After considering all of this, we believe that Ainsworth Game Technology’s statutory profit probably underestimates its revenue potential! If you want to dig deeper into Ainsworth gaming technology, you should also consider the risks it currently faces. For example, we found 1 warning sign which you should browse to get a better picture of Ainsworth gaming technology.

After our review of the nature of Ainsworth Game Technology’s earnings, we came away optimistic for the business. But there’s always more to discover if you’re able to focus on the details. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders are buying. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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