There May Be Reason For Hope In Techno Medica's (TSE:6678) Disappointing Earnings

Soft earnings didn't appear to concern Techno Medica Co., Ltd.'s (TSE:6678) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Techno Medica

A Closer Look At Techno Medica'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Techno Medica has an accrual ratio of -0.20 for the year to September 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of JP¥2.1b in the last year, which was a lot more than its statutory profit of JP¥1.19b. Techno Medica'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 Techno Medica.

Our Take On Techno Medica's Profit Performance

Happily for shareholders, Techno Medica produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Techno Medica's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 5.7% per year over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Techno Medica you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Techno Medica'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. 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.