We Think That There Are Some Issues For ArtnerLtd (TSE:2163) Beyond Its Promising Earnings

The market for Artner Co.,Ltd.'s (TSE:2163) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

See our latest analysis for ArtnerLtd

Examining Cashflow Against ArtnerLtd'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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

ArtnerLtd has an accrual ratio of 0.60 for the year to July 2024. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of JP¥938m in the last year, which was a lot less than its statutory profit of JP¥1.11b. Notably ArtnerLtd's free cash flow was stable over the last year.

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

Our Take On ArtnerLtd's Profit Performance

As we have made quite clear, we're a bit worried that ArtnerLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that ArtnerLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 54% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about ArtnerLtd as a business, it's important to be aware of any risks it's facing. For example, ArtnerLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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