We Think You Can Look Beyond Wakachiku Construction's (TSE:1888) Lackluster Earnings

Soft earnings didn't appear to concern Wakachiku Construction Co., Ltd.'s (TSE:1888) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Wakachiku Construction

Zooming In On Wakachiku Construction'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. 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. 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 September 2024, Wakachiku Construction recorded an accrual ratio of -0.19. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of JP¥9.0b during the period, dwarfing its reported profit of JP¥3.06b. Notably, Wakachiku Construction had negative free cash flow last year, so the JP¥9.0b 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 Wakachiku Construction.

Our Take On Wakachiku Construction's Profit Performance

Happily for shareholders, Wakachiku Construction produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Wakachiku Construction's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. 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 want to do dive deeper into Wakachiku Construction, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Wakachiku Construction and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of Wakachiku Construction'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.