Solid Earnings Reflect S.IshimitsuLtd's (TSE:2750) Strength As A Business

Investors were underwhelmed by the solid earnings posted by S.Ishimitsu & Co.,Ltd. (TSE:2750) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

Check out our latest analysis for S.IshimitsuLtd

A Closer Look At S.IshimitsuLtd'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. 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. 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 2024, S.IshimitsuLtd recorded an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of JP¥3.4b in the last year, which was a lot more than its statutory profit of JP¥1.05b. Given that S.IshimitsuLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥3.4b 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 S.IshimitsuLtd.

Our Take On S.IshimitsuLtd's Profit Performance

S.IshimitsuLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think S.IshimitsuLtd'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 an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 2 warning signs for S.IshimitsuLtd you should be aware of.

This note has only looked at a single factor that sheds light on the nature of S.IshimitsuLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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.