Shareholders Can Be Confident That Phil CompanyInc's (TSE:3267) Earnings Are High Quality

Investors were underwhelmed by the solid earnings posted by Phil Company,Inc. (TSE:3267) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

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Zooming In On Phil CompanyInc's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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".

For the year to May 2025, Phil CompanyInc had an accrual ratio of -1.18. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of JP¥1.7b during the period, dwarfing its reported profit of JP¥531.0m. Given that Phil CompanyInc had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥1.7b 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 Phil CompanyInc.

Our Take On Phil CompanyInc's Profit Performance

As we discussed above, Phil CompanyInc's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Phil CompanyInc's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Phil CompanyInc at this point in time. Every company has risks, and we've spotted 3 warning signs for Phil CompanyInc (of which 1 is concerning!) you should know about.

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