Objective Corporation Moved a Third of Its Profit Onto the Balance Sheet

The claim#

The shares have fallen about 64% in twelve months, from a high of $23.10 to $6.74, and the case that survives the fall is a value case. On the reported numbers the company earns a pre-tax profit of $41.4m, grew net profit 13% to $35.4m, pays a 3.9% yield and trades on roughly 17.6 times earnings. Brokers rate it a buy with an average target of $11.82 — implied upside of about three-quarters. The pitch is a profitable, cash-generative software compounder that the market has thrown out with the growth stocks.

That pitch rests on the reported profit. The reported profit rests on an accounting choice the company made two years ago and has never reversed.

The constraint#

Software companies spend heavily building software. Under AASB 138 that spend can be treated two ways. Research, and development that cannot be reliably measured, is expensed — it hits the profit-and-loss in the year it is incurred. Development that meets a feasibility and measurement test may instead be capitalised — parked on the balance sheet as an asset and released into the accounts slowly, as amortisation, over years.

The choice does not change the cash. It changes the reported profit. Money that is capitalised does not reduce this year’s earnings; it reduces future years’ earnings a little at a time. So the more a company capitalises, the higher its reported profit today, for exactly the same business.

Until FY2024 this company capitalised none of it. The capitalised-development balance was nil at 30 June 2023, and pre-tax profit that year was $21.978m with every dollar of development run through the accounts. In FY2024 the company began capitalising, and it explained why in its own words.

This does not represent a change in the Company’s accounting policy but rather is the result of operational measures being put in place to reliably identify and measure specific development costs that meet the criteria for capitalisation under AASB 138 from 1 July 2023.

Objective Corporation, Annual Report 2024, Note 16

Whatever the label, the effect from 1 July 2023 was that development which had been expensed began to be capitalised: $14.084m of it in FY2024, $15.674m in FY2025. The line where that spending used to appear tells the story on its own. Research and development expensed fell from $27.208m in FY2023 to $15.552m in FY2025 — a $11.7m fall — while revenue over the same period rose from $110.4m to $123.5m. The cost of building the software did not fall. Where it is recorded moved.

The gap#

Quantify the benefit and it is large, and it recurs. The net effect on pre-tax profit in a year is the amount capitalised less the amortisation charged against the asset that has built up — because if the spend were expensed, the additions would hit the accounts and the amortisation would not exist.

In FY2025 the company capitalised $15.674m and charged $2.994m of amortisation. Additions were 5.2 times amortisation. The difference, $12.68m, is 30.6% of the $41.373m reported pre-tax profit. In FY2024 the same arithmetic — $14.084m capitalised against $1.400m amortised — was $12.684m, or 33.1% of that year’s profit. Two consecutive years in which roughly a third of reported pre-tax profit is the capitalisation choice rather than the trading.

Set reported profit beside the profit the same business would have reported with development expensed, and the two lines start together in FY2023 and pull apart.

On an expensed basis, FY2025 pre-tax profit would have been about $28.7m rather than $41.4m. EBITDA is flattered further still: because the offsetting amortisation sits below the EBITDA line and is added back anyway, capitalising lifts EBITDA by the full additions. Reported EBITDA of about $49.2m would be about $33.5m — nearly a third lower — if the development were expensed.

That reaches the valuation directly. The buy case leans on a trailing multiple near 17.6×. Apply the company’s own effective tax rate to the expensed-basis profit and earnings per share fall from the reported 37.2 cents toward about 25.7 cents, which at $6.74 is a multiple closer to 26×. The shares are cheaper than they were; they are not as cheap as the reported earnings make them look. This recast is the desk’s illustration, not a company figure, and it assumes the effective tax rate holds.

The asset that has never been tested#

The balance built from this choice has grown from nothing to $25.527m in twenty-four months, and it has never been written down.

Two features of the asset are worth stating plainly, because both push reported profit the same way. First, the amortisation charged against it is small relative to what is being added — 5.2 times smaller in FY2025 — so the asset compounds and the annual benefit does not unwind. Second, between FY2024 and FY2025 the stated useful life was extended from 3–5 years to 2–10 years. A longer life means a slower amortisation charge against a growing balance. The company’s auditor identified the same two judgements as the reason software development costs are a key audit matter: “the assessment of the useful life of the asset and timing of amortisation”, and “the assessment of future economic benefits and any indicators of impairment”.

Corroboration#

These are secondary. None is the thesis; each is consistent with it.

A directly comparable listed peer expenses what this company capitalises. Gentrack, an ANZ enterprise-software company of similar scale, capitalised nil development in FY2024 and FY2025 and expensed all NZ$21.6m of its research and development; its capitalised-development balance ran to zero. The same kind of spending is treated as an asset here and as a cost there.

Reported profit rose while operating cash fell. Net cash from operations was $46.3m in FY2025, down 17% from $55.8m, even as pre-tax profit rose 8% and net profit rose 13%. Free cash flow — operating cash less capital spending and the money paid for intangibles — was about $30.0m, below the reported net profit of $35.4m. The single largest investing outflow was the $15.674m of development that never touched the profit line.

Capital returns rose into the cash decline. Dividends paid roughly doubled to $24.8m in FY2025, and an on-market buy-back has run through 2026. Returning capital is not a criticism; doing so while operating cash falls and a third of reported profit is an accounting entry is a question about the durability of the earnings that fund it.

What could explain this instead#

Three explanations would blunt or break the thesis. Each is argued here in good faith.

The treatment is compliant, audited, and required. AASB 138 does not merely permit capitalising qualifying development — it requires it once the feasibility and measurement criteria are met. The company says as much, frames the FY2024 change as improved measurement rather than a policy choice, and its auditor accepts the treatment as a key audit matter examined and signed. This is the strongest defence, and it is correct as far as it goes: nothing here is a breach. The rejoinder is that compliance sets a floor, not a ceiling — the standard leaves real latitude in what is judged reliably measurable, in the useful life, and in when an impairment indicator is recognised, and every one of those judgements here runs in the direction that lifts reported profit. What would settle it: the project-level detail and the useful-life basis. Field item 1 exists to obtain them.

The benefit is a timing effect that will unwind. As the asset matures, amortisation rises toward the level of additions, the net benefit shrinks, and reported profit converges on the expensed-basis figure. If additions plateau, this is right. What would settle it: additions falling toward the amortisation charge in FY2026 and beyond. So far they have not — additions have run about five times amortisation for two years and the balance has doubled, and the useful-life extension pushes the convergence further out. Field item 4 tracks it.

Capitalisation is normal for enterprise software, and the peer is the outlier. Other listed software names capitalise a substantial share of development; a larger ASX enterprise-software peer capitalises more than half. On this reading Gentrack’s all-expensing is the unusual choice and this company sits in the mainstream. What would settle it: a like-for-like capitalisation rate across a defined peer set, computed the same way. Field item 3 exists to build it. If peers cluster near half, the argument narrows to the useful-life extension and the never-tested asset; if they cluster near zero, it widens.

Kill criteria#

The thesis fails if any of the following holds.

1. The FY2026 accounts show amortisation rising to roughly the level of additions, so the net pre-tax benefit falls below about 10% of profit and is visibly unwinding.
2. A like-for-like capitalisation rate across a defined set of ASX-listed enterprise-software peers shows this company at or below the peer median.
3. The company discloses project-level detail showing the capitalised assets are shipped, in use and long-lived, with a useful-life basis that withstands scrutiny.
4. An impairment is taken, or the useful life is shortened, bringing the carrying value and the amortisation charge into line with the assets’ economic life.
5. The market and analyst estimates are shown to already value the company on an expensed-equivalent basis, so the reported multiple is not what the buy case relies on.

Kill criterion 1 is the near one. The FY2026 full-year accounts are expected around August 2026.

Right of reply#

The company was not contacted before publication. Every figure above is drawn from its own lodged annual reports and its own auditor’s report, each linked in full, and from a comparable peer’s lodged accounts and public market data. Where the company has addressed the point — its explanation of the FY2024 change, its stated useful-life basis, its impairment testing — its position is quoted in its own words and engaged with rather than dismissed. Nothing here alleges any breach of law or of the accounting standards; the treatment is compliant. The argument is that reported profit is materially a product of a permitted accounting choice, and that the case for the shares depends on it.