Sumiken Mitsui RoadLtd's (TSE:1776) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Sumiken Mitsui Road Co.,Ltd.'s (TSE:1776) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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Examining Cashflow Against Sumiken Mitsui RoadLtd'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2025, Sumiken Mitsui RoadLtd had an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of JP¥1.1b, well over the JP¥268.0m it reported in profit. Notably, Sumiken Mitsui RoadLtd had negative free cash flow last year, so the JP¥1.1b it produced this year was a welcome improvement.

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

Our Take On Sumiken Mitsui RoadLtd's Profit Performance

Sumiken Mitsui RoadLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Sumiken Mitsui RoadLtd's earnings potential is at least as good as it seems, and maybe even better! 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 while earnings quality is important, it's equally important to consider the risks facing Sumiken Mitsui RoadLtd at this point in time. For instance, we've identified 4 warning signs for Sumiken Mitsui RoadLtd (1 is a bit unpleasant) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Sumiken Mitsui RoadLtd'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.