There May Be Some Bright Spots In Premium Water HoldingsInc's (TSE:2588) Earnings

Soft earnings didn't appear to concern Premium Water Holdings,Inc.'s (TSE:2588) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Premium Water HoldingsInc

Examining Cashflow Against Premium Water HoldingsInc's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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 2024, Premium Water HoldingsInc recorded an accrual ratio of -0.26. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of JP¥15b, well over the JP¥5.78b it reported in profit. Premium Water HoldingsInc's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Premium Water HoldingsInc.

Our Take On Premium Water HoldingsInc's Profit Performance

As we discussed above, Premium Water HoldingsInc's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Premium Water HoldingsInc's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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. If you want to do dive deeper into Premium Water HoldingsInc, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for Premium Water HoldingsInc and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of Premium Water HoldingsInc'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.

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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.