Tokyu Construction's (TSE:1720) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Tokyu Construction Co., Ltd.'s (TSE:1720) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

We've discovered 1 warning sign about Tokyu Construction. View them for free.

A Closer Look At Tokyu Construction'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. 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. 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.

Over the twelve months to March 2025, Tokyu Construction recorded an accrual ratio of -0.29. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥38b during the period, dwarfing its reported profit of JP¥6.63b. Notably, Tokyu Construction had negative free cash flow last year, so the JP¥38b it produced this year was a welcome improvement.

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 Tokyu Construction's Profit Performance

As we discussed above, Tokyu Construction's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Tokyu Construction's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Tokyu Construction, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Tokyu Construction's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.