We Think CSS HoldingsLtd's (TSE:2304) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by the solid earnings posted by CSS Holdings,Ltd. (TSE:2304) recently. Along with the solid headline numbers, we think that investors have some reasons for optimism.

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Examining Cashflow Against CSS HoldingsLtd'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

CSS HoldingsLtd has an accrual ratio of -0.12 for the year to March 2025. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of JP¥712m during the period, dwarfing its reported profit of JP¥408.0m. CSS HoldingsLtd's 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 CSS HoldingsLtd.

Our Take On CSS HoldingsLtd's Profit Performance

As we discussed above, CSS HoldingsLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think CSS HoldingsLtd's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 16% in the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. At Simply Wall St, we found 2 warning signs for CSS HoldingsLtd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of CSS HoldingsLtd's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.