Ohki Healthcare HoldingsLtd's (TSE:3417) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The subdued market reaction suggests that Ohki Healthcare Holdings Co.,Ltd.'s (TSE:3417) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

Check out our latest analysis for Ohki Healthcare HoldingsLtd

A Closer Look At Ohki Healthcare HoldingsLtd'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. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Ohki Healthcare HoldingsLtd had an accrual ratio of 0.35. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥9.2b despite its profit of JP¥1.87b, mentioned above. It's worth noting that Ohki Healthcare HoldingsLtd generated positive FCF of JP¥6.1b a year ago, so at least they've done it in the past. One positive for Ohki Healthcare HoldingsLtd shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ohki Healthcare HoldingsLtd.

Our Take On Ohki Healthcare HoldingsLtd's Profit Performance

As we discussed above, we think Ohki Healthcare HoldingsLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Ohki Healthcare HoldingsLtd's underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 15% over the last three years. 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 Ohki Healthcare HoldingsLtd, you'd also look into what risks it is currently facing. Our analysis shows 5 warning signs for Ohki Healthcare HoldingsLtd (2 make us uncomfortable!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Ohki Healthcare HoldingsLtd'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.