We Think You Can Look Beyond EBARA Foods IndustryInc's (TSE:2819) Lackluster Earnings

Soft earnings didn't appear to concern EBARA Foods Industry,Inc.'s (TSE:2819) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

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Zooming In On EBARA Foods IndustryInc'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2025, EBARA Foods IndustryInc had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of JP¥3.2b in the last year, which was a lot more than its statutory profit of JP¥1.02b. Notably, EBARA Foods IndustryInc had negative free cash flow last year, so the JP¥3.2b it produced this year was a welcome improvement. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

View our latest analysis for EBARA Foods IndustryInc

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of EBARA Foods IndustryInc.

The Impact Of Unusual Items On Profit

EBARA Foods IndustryInc's profit was reduced by unusual items worth JP¥442m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect EBARA Foods IndustryInc to produce a higher profit next year, all else being equal.

Our Take On EBARA Foods IndustryInc's Profit Performance

In conclusion, both EBARA Foods IndustryInc's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think EBARA Foods IndustryInc's earnings potential is at least as good as it seems, and maybe even better! If you'd like to know more about EBARA Foods IndustryInc as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for EBARA Foods IndustryInc (1 doesn't sit too well with us!) that we believe deserve your full attention.

After our examination into the nature of EBARA Foods IndustryInc's profit, we've come away optimistic for the company. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.