Agratio urban design's (TSE:3467) Earnings Are Of Questionable Quality

Agratio urban design Inc. (TSE:3467) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

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A Closer Look At Agratio urban design'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. 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.

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.

Agratio urban design has an accrual ratio of 0.24 for the year to September 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of JP¥1.83b, a look at free cash flow indicates it actually burnt through JP¥3.9b in the last year. We also note that Agratio urban design's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥3.9b.

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

Our Take On Agratio urban design's Profit Performance

Agratio urban design's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Agratio urban design's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 28% EPS growth in the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 5 warning signs for Agratio urban design you should be mindful of and 2 of these shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Agratio urban design's profit. 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. 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.