We Think Mirai Works' (TSE:6563) Healthy Earnings Might Be Conservative

Shareholders appeared to be happy with Mirai Works Inc.'s (TSE:6563) solid earnings report last week. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

View our latest analysis for Mirai Works

Examining Cashflow Against Mirai Works' 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. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2024, Mirai Works had an accrual ratio of -3.45. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥473m during the period, dwarfing its reported profit of JP¥187.0m. Unfortunately, we don't have data on Mirai Works' free cash flow for the prior year; that's not necessarily a bad thing, though we do generally prefer to be able to see a bit of a company's history.

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

Our Take On Mirai Works' Profit Performance

Happily for shareholders, Mirai Works produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Mirai Works' 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. If you'd like to know more about Mirai Works as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Mirai Works you should know about.

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