Miyaji Engineering GroupInc's (TSE:3431) Earnings Are Of Questionable Quality

Despite announcing strong earnings, Miyaji Engineering Group,Inc.'s (TSE:3431) stock was sluggish. We did some digging and found some worrying underlying problems.

We've discovered 2 warning signs about Miyaji Engineering GroupInc. View them for free.

A Closer Look At Miyaji Engineering GroupInc'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Miyaji Engineering GroupInc has an accrual ratio of 0.30 for the year to March 2025. 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. Over the last year it actually had negative free cash flow of JP¥5.3b, in contrast to the aforementioned profit of JP¥4.86b. We saw that FCF was JP¥6.9b a year ago though, so Miyaji Engineering GroupInc has at least been able to generate positive FCF in the past. The good news for shareholders is that Miyaji Engineering GroupInc'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 Miyaji Engineering GroupInc.

Our Take On Miyaji Engineering GroupInc's Profit Performance

Miyaji Engineering GroupInc's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Miyaji Engineering GroupInc's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 45% over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 2 warning signs for Miyaji Engineering GroupInc (1 is potentially serious) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Miyaji Engineering GroupInc'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 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.