QLS Holdings' (TSE:7075) Solid Profits Have Weak Fundamentals

Despite posting some strong earnings, the market for QLS Holdings Co., Ltd's (TSE:7075) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

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A Closer Look At QLS 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

For the year to September 2025, QLS Holdings had an accrual ratio of -0.10. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of JP¥621m during the period, dwarfing its reported profit of JP¥458.0m. QLS Holdings' free cash flow improved over the last year, which is generally good to see. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. QLS Holdings expanded the number of shares on issue by 11% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out QLS Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of QLS Holdings' Dilution On Its Earnings Per Share (EPS)

Three years ago, QLS Holdings lost money. The good news is that profit was up 40% in the last twelve months. On the other hand, earnings per share are only up 28% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So QLS Holdings shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On QLS Holdings' Profit Performance

In conclusion, QLS Holdings has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. Given the contrasting considerations, we don't have a strong view as to whether QLS Holdings's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into QLS Holdings, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for QLS Holdings and you'll want to know about it.

Our examination of QLS Holdings has focussed on certain factors that can make its earnings look better than they are. 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.