Statutory Profit Doesn't Reflect How Good Sanyu ConstructionLtd's (TSE:1841) Earnings Are

Even though Sanyu Construction Co.,Ltd.'s (TSE:1841) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Sanyu ConstructionLtd

A Closer Look At Sanyu ConstructionLtd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Sanyu ConstructionLtd recorded an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of JP¥1.8b during the period, dwarfing its reported profit of JP¥632.0m. Notably, Sanyu ConstructionLtd had negative free cash flow last year, so the JP¥1.8b 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 Sanyu ConstructionLtd.

Our Take On Sanyu ConstructionLtd's Profit Performance

Sanyu ConstructionLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Sanyu ConstructionLtd's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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. If you'd like to know more about Sanyu ConstructionLtd as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Sanyu ConstructionLtd you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Sanyu ConstructionLtd'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 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.