We Think Printnet's (TSE:7805) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by last week's earnings announcement from Printnet Inc. (TSE:7805) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

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Zooming In On Printnet's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Printnet has an accrual ratio of -0.14 for the year to August 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥1.0b during the period, dwarfing its reported profit of JP¥433.0m. Printnet shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Check out our latest analysis for Printnet

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

The Impact Of Unusual Items On Profit

Surprisingly, given Printnet's accrual ratio implied strong cash conversion, its paper profit was actually boosted by JP¥112m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If Printnet doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Printnet's Profit Performance

Printnet's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if Printnet's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Printnet, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Printnet you should be aware of.

Our examination of Printnet has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.