Some Investors May Be Willing To Look Past Taisei Oncho's (TSE:1904) Soft Earnings

The market was pleased with the recent earnings report from Taisei Oncho Co., Ltd. (TSE:1904), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

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Examining Cashflow Against Taisei Oncho'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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.

Taisei Oncho has an accrual ratio of -0.15 for the year to September 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of JP¥5.1b during the period, dwarfing its reported profit of JP¥2.25b. Given that Taisei Oncho had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥5.1b would seem to be a step in the right direction. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

View our latest analysis for Taisei Oncho

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

How Do Unusual Items Influence Profit?

Taisei Oncho's profit was reduced by unusual items worth JP¥430m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Taisei Oncho to produce a higher profit next year, all else being equal.

Our Take On Taisei Oncho's Profit Performance

In conclusion, both Taisei Oncho's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Taisei Oncho's earnings potential is at least as good as it seems, and maybe even better! While earnings are important, another area to consider is the balance sheet. If you're interested we have a graphic representation of Taisei Oncho's balance sheet.

Our examination of Taisei Oncho has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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.