There Are Some Holes In Oriental Chain Mfg's (TSE:6380) Solid Earnings Release

Shareholders didn't seem to be thrilled with Oriental Chain Mfg. Co., Ltd.'s (TSE:6380) recent earnings report, despite healthy profit numbers. We think that they might be concerned about some underlying details that our analysis found.

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Examining Cashflow Against Oriental Chain Mfg'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. 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.

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. 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".

Oriental Chain Mfg has an accrual ratio of 0.38 for the year to September 2025. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of JP¥499m, in contrast to the aforementioned profit of JP¥158.0m. Unfortunately, we don't have data on Oriental Chain Mfg's free cash flow for the prior year; that's not necessarily a bad thing, though we do generally prefer to be able to see a bit of a company's history. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

View our latest analysis for Oriental Chain Mfg

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Oriental Chain Mfg.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Oriental Chain Mfg's profit was boosted by unusual items worth JP¥157m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that Oriental Chain Mfg's positive unusual items were quite significant relative to its profit in the year to September 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Oriental Chain Mfg's Profit Performance

Summing up, Oriental Chain Mfg received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Oriental Chain Mfg's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Oriental Chain Mfg at this point in time. Be aware that Oriental Chain Mfg is showing 5 warning signs in our investment analysis and 3 of those can't be ignored...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.