Investors Can Find Comfort In Aiko's (TYO:9909) Earnings Quality

By
Simply Wall St
Published
May 08, 2021
JASDAQ:9909
Source: Shutterstock

The market for Aiko Corporation's (TYO:9909) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Aiko

earnings-and-revenue-history
JASDAQ:9909 Earnings and Revenue History May 8th 2021

Examining Cashflow Against Aiko's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Aiko has an accrual ratio of -0.12 for the year to March 2021. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of JP¥385m during the period, dwarfing its reported profit of JP¥144.0m. Aiko's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Aiko's Profit Performance

As we discussed above, Aiko has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Aiko's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Aiko, and understanding these bad boys should be part of your investment process.

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

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