We Think Kitanotatsujin's (TSE:2930) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by the solid earnings posted by Kitanotatsujin Corporation (TSE:2930) recently. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

Our free stock report includes 2 warning signs investors should be aware of before investing in Kitanotatsujin. Read for free now.

Zooming In On Kitanotatsujin'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. 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. 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 February 2025, Kitanotatsujin recorded an accrual ratio of -0.20. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of JP¥1.6b, well over the JP¥1.21b it reported in profit. Kitanotatsujin shareholders are no doubt pleased that free cash flow improved over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Kitanotatsujin's Profit Performance

As we discussed above, Kitanotatsujin's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Kitanotatsujin's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 22% over the last twelve months. 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. If you'd like to know more about Kitanotatsujin as a business, it's important to be aware of any risks it's facing. For example, Kitanotatsujin has 2 warning signs (and 1 which can't be ignored) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Kitanotatsujin's profit. But there are plenty of other ways to inform your opinion of a company. 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.