Some Investors May Be Willing To Look Past Daishin ChemicalLtd's (TSE:4629) Soft Earnings

The market for Daishin Chemical Co.,Ltd.'s (TSE:4629) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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Examining Cashflow Against Daishin ChemicalLtd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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.

Daishin ChemicalLtd has an accrual ratio of -0.18 for the year to March 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of JP¥2.5b in the last year, which was a lot more than its statutory profit of JP¥588.0m. Given that Daishin ChemicalLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥2.5b would seem to be a step in the right direction.

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

Our Take On Daishin ChemicalLtd's Profit Performance

As we discussed above, Daishin ChemicalLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Daishin ChemicalLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Daishin ChemicalLtd.

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