Takasago Tekko K.K's (TSE:5458) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern Takasago Tekko K.K.'s (TSE:5458) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Takasago Tekko K.K

A Closer Look At Takasago Tekko K.K'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, Takasago Tekko K.K recorded an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥666m in the last year, which was a lot more than its statutory profit of JP¥234.0m. Given that Takasago Tekko K.K had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥666m 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 Takasago Tekko K.K.

Our Take On Takasago Tekko K.K's Profit Performance

As we discussed above, Takasago Tekko K.K has perfectly satisfactory free cash flow relative to profit. Because of this, we think Takasago Tekko K.K's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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'd like to know more about Takasago Tekko K.K as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Takasago Tekko K.K you should know about.

This note has only looked at a single factor that sheds light on the nature of Takasago Tekko K.K'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. 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.