We Think MRK Holdings' (TSE:9980) Robust Earnings Are Conservative

MRK Holdings Inc. (TSE:9980) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

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Zooming In On MRK Holdings' 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). 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.

MRK Holdings has an accrual ratio of -0.13 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¥2.4b in the last year, which was a lot more than its statutory profit of JP¥479.0m. Notably, MRK Holdings had negative free cash flow last year, so the JP¥2.4b it produced this year was a welcome improvement.

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

Our Take On MRK Holdings' Profit Performance

MRK Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that MRK Holdings' statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 78% in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about MRK Holdings as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with MRK Holdings, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of MRK Holdings' 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.