Statutory Profit Doesn't Reflect How Good Eternal Hospitality GroupLtd's (TSE:3193) Earnings Are

Eternal Hospitality Group Co.,Ltd.'s (TSE:3193) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for Eternal Hospitality GroupLtd

Examining Cashflow Against Eternal Hospitality GroupLtd'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to July 2024, Eternal Hospitality GroupLtd recorded an accrual ratio of -0.18. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of JP¥2.8b during the period, dwarfing its reported profit of JP¥2.13b. Eternal Hospitality GroupLtd's free cash flow improved over the last year, which is generally good to see.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Eternal Hospitality GroupLtd's Profit Performance

Happily for shareholders, Eternal Hospitality GroupLtd produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Eternal Hospitality GroupLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Furthermore, it has done a great job growing EPS over 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. In terms of investment risks, we've identified 1 warning sign with Eternal Hospitality GroupLtd, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Eternal Hospitality GroupLtd'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. 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.

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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.