Maxvalu TokaiLtd (TSE:8198) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Maxvalu Tokai Co.,Ltd. (TSE:8198) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Our free stock report includes 2 warning signs investors should be aware of before investing in Maxvalu TokaiLtd. Read for free now.

A Closer Look At Maxvalu TokaiLtd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to February 2025, Maxvalu TokaiLtd recorded an accrual ratio of 0.22. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of JP¥9.39b, a look at free cash flow indicates it actually burnt through JP¥698m in the last year. It's worth noting that Maxvalu TokaiLtd generated positive FCF of JP¥12b a year ago, so at least they've done it in the past. The good news for shareholders is that Maxvalu TokaiLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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 Maxvalu TokaiLtd.

Our Take On Maxvalu TokaiLtd's Profit Performance

Maxvalu TokaiLtd'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 Maxvalu TokaiLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 40% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 2 warning signs for Maxvalu TokaiLtd (1 is concerning!) that we believe deserve your full attention.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.