ITOCHU-SHOKUHIN's (TSE:2692) Solid Profits Have Weak Fundamentals

ITOCHU-SHOKUHIN Co., Ltd. (TSE:2692) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Our free stock report includes 1 warning sign investors should be aware of before investing in ITOCHU-SHOKUHIN. Read for free now.

A Closer Look At ITOCHU-SHOKUHIN'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2025, ITOCHU-SHOKUHIN recorded an accrual ratio of 0.23. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of JP¥4.3b, in contrast to the aforementioned profit of JP¥8.20b. We saw that FCF was JP¥8.7b a year ago though, so ITOCHU-SHOKUHIN has at least been able to generate positive FCF in the past. One positive for ITOCHU-SHOKUHIN shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On ITOCHU-SHOKUHIN's Profit Performance

ITOCHU-SHOKUHIN didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that ITOCHU-SHOKUHIN's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 ITOCHU-SHOKUHIN as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for ITOCHU-SHOKUHIN you should be aware of.

This note has only looked at a single factor that sheds light on the nature of ITOCHU-SHOKUHIN's 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. 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.