Nankai Tatsumura Construction's (TSE:1850) Solid Earnings Are Supported By Other Strong Factors

Nankai Tatsumura Construction Co., Ltd. (TSE:1850) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Zooming In On Nankai Tatsumura Construction's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

Nankai Tatsumura Construction has an accrual ratio of -0.10 for the year to September 2025. 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¥3.3b during the period, dwarfing its reported profit of JP¥2.07b. Nankai Tatsumura Construction shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Nankai Tatsumura Construction's Profit Performance

As we discussed above, Nankai Tatsumura Construction has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Nankai Tatsumura Construction's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 29% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 1 warning sign for Nankai Tatsumura Construction you should know about.

Today we've zoomed in on a single data point to better understand the nature of Nankai Tatsumura Construction's profit. But there are plenty of other ways to inform your opinion of a company. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.