We Think That There Are More Issues For Yahagi ConstructionLtd (TSE:1870) Than Just Sluggish Earnings

Despite Yahagi Construction Co.,Ltd.'s (TSE:1870) recent earnings report having lackluster headline numbers, the market responded positively. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

Our free stock report includes 2 warning signs investors should be aware of before investing in Yahagi ConstructionLtd. Read for free now.

Examining Cashflow Against Yahagi ConstructionLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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. 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, Yahagi ConstructionLtd recorded an accrual ratio of 0.29. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of JP¥5.64b, a look at free cash flow indicates it actually burnt through JP¥18b in the last year. It's worth noting that Yahagi ConstructionLtd generated positive FCF of JP¥7.8b a year ago, so at least they've done it in the past. The good news for shareholders is that Yahagi ConstructionLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On Yahagi ConstructionLtd's Profit Performance

Yahagi ConstructionLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Yahagi ConstructionLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 17% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Yahagi ConstructionLtd at this point in time. Case in point: We've spotted 2 warning signs for Yahagi ConstructionLtd you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Yahagi ConstructionLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.