The Strong Earnings Posted By Kaneshita ConstructionLtd (TSE:1897) Are A Good Indication Of The Strength Of The Business

The Kaneshita Construction Co.,Ltd. (TSE:1897) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Kaneshita ConstructionLtd

Examining Cashflow Against Kaneshita ConstructionLtd'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). 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2023, Kaneshita ConstructionLtd recorded an accrual ratio of -0.12. 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¥1.4b, well over the JP¥270.0m it reported in profit. Given that Kaneshita ConstructionLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥1.4b would seem to be a step in the right direction.

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

Our Take On Kaneshita ConstructionLtd's Profit Performance

As we discussed above, Kaneshita ConstructionLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Kaneshita ConstructionLtd's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 42% over 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. If you'd like to know more about Kaneshita ConstructionLtd as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Kaneshita ConstructionLtd you should be mindful of and 1 of them is a bit concerning.

This note has only looked at a single factor that sheds light on the nature of Kaneshita 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 that insiders are buying.

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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.