We Think That There Are Issues Underlying Ichimasa Kamaboko's (TSE:2904) Earnings

Ichimasa Kamaboko Co., Ltd.'s (TSE:2904) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

View our latest analysis for Ichimasa Kamaboko

Examining Cashflow Against Ichimasa Kamaboko'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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.

Ichimasa Kamaboko has an accrual ratio of -0.10 for the year to June 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of JP¥3.1b during the period, dwarfing its reported profit of JP¥957.0m. Notably, Ichimasa Kamaboko had negative free cash flow last year, so the JP¥3.1b it produced this year was a welcome improvement. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

The Impact Of Unusual Items On Profit

Surprisingly, given Ichimasa Kamaboko's accrual ratio implied strong cash conversion, its paper profit was actually boosted by JP¥155m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. If Ichimasa Kamaboko doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Ichimasa Kamaboko's Profit Performance

Ichimasa Kamaboko's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Given the contrasting considerations, we don't have a strong view as to whether Ichimasa Kamaboko's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Ichimasa Kamaboko as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Ichimasa Kamaboko you should be mindful of and 1 of them is a bit unpleasant.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.