There May Be Reason For Hope In Sansei Technologies' (TSE:6357) Disappointing Earnings

Investors were disappointed with the weak earnings posted by Sansei Technologies, Inc. (TSE:6357 ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

See our latest analysis for Sansei Technologies

Examining Cashflow Against Sansei Technologies' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Sansei Technologies has an accrual ratio of -0.14 for the year to September 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of JP¥7.6b in the last year, which was a lot more than its statutory profit of JP¥2.13b. Sansei Technologies' free cash flow improved over the last year, which is generally good to see.

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

Our Take On Sansei Technologies' Profit Performance

As we discussed above, Sansei Technologies has perfectly satisfactory free cash flow relative to profit. Because of this, we think Sansei Technologies' earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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 Sansei Technologies, you'd also look into what risks it is currently facing. At Simply Wall St, we found 2 warning signs for Sansei Technologies and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Sansei Technologies' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.