We Think Asahi Songwon Colors' (NSE:ASAHISONG) Profit Is Only A Baseline For What They Can Achieve

Asahi Songwon Colors Limited (NSE:ASAHISONG) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

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A Closer Look At Asahi Songwon Colors' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Asahi Songwon Colors has an accrual ratio of -0.13 for the year to September 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₹746m in the last year, which was a lot more than its statutory profit of ₹161.6m. Given that Asahi Songwon Colors had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹746m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Asahi Songwon Colors.

Our Take On Asahi Songwon Colors' Profit Performance

As we discussed above, Asahi Songwon Colors has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Asahi Songwon Colors' statutory profit actually understates its earnings potential! And the EPS is up 18% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Asahi Songwon Colors (of which 2 are potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Asahi Songwon Colors' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.