We Like The Quality Of ShinMaywa Industries' (TSE:7224) Earnings

ShinMaywa Industries, Ltd.'s (TSE:7224) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

See our latest analysis for ShinMaywa Industries

Zooming In On ShinMaywa Industries' 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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, ShinMaywa Industries had an accrual ratio of -0.14. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥28b during the period, dwarfing its reported profit of JP¥7.48b. Given that ShinMaywa Industries had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥28b 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 ShinMaywa Industries.

Our Take On ShinMaywa Industries' Profit Performance

ShinMaywa Industries' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think ShinMaywa Industries' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 11% per year 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. So while earnings quality is important, it's equally important to consider the risks facing ShinMaywa Industries at this point in time. For example - ShinMaywa Industries has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of ShinMaywa Industries' 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. 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.