KanamotoLtd's (TSE:9678) Earnings May Just Be The Starting Point

When companies post strong earnings, the stock generally performs well, just like Kanamoto Co.,Ltd.'s (TSE:9678) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

See our latest analysis for KanamotoLtd

A Closer Look At KanamotoLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

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.

Over the twelve months to April 2024, KanamotoLtd recorded an accrual ratio of -0.17. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of JP¥31b, well over the JP¥7.42b it reported in profit. KanamotoLtd did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On KanamotoLtd's Profit Performance

As we discussed above, KanamotoLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think KanamotoLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 13% over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about KanamotoLtd as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for KanamotoLtd you should know about.

This note has only looked at a single factor that sheds light on the nature of KanamotoLtd's 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com