Careerlink's (TSE:6070) Earnings Seem To Be Promising

The market seemed underwhelmed by last week's earnings announcement from Careerlink Co., Ltd. (TSE:6070) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

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A Closer Look At Careerlink'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Careerlink has an accrual ratio of -0.11 for the year to September 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of JP¥2.8b in the last year, which was a lot more than its statutory profit of JP¥2.35b. Careerlink shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Careerlink's Profit Performance

As we discussed above, Careerlink has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Careerlink's statutory profit actually understates its earnings potential! 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. 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. You'd be interested to know, that we found 1 warning sign for Careerlink and you'll want to know about this.

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