e'grandLtd's (TSE:3294) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern e'grand Co.,Ltd's (TSE:3294) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for e'grandLtd

Examining Cashflow Against e'grandLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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 March 2024, e'grandLtd had an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of JP¥3.6b in the last year, which was a lot more than its statutory profit of JP¥1.26b. Given that e'grandLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥3.6b 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 e'grandLtd.

Our Take On e'grandLtd's Profit Performance

As we discussed above, e'grandLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think e'grandLtd's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 40% per year over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 3 warning signs for e'grandLtd and we think they deserve your attention.

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