Tohokushinsha Film's (TSE:2329) Earnings Might Not Be As Promising As They Seem

Shareholders didn't seem to be thrilled with Tohokushinsha Film Corporation's (TSE:2329) recent earnings report, despite healthy profit numbers. Our analysis has found some concerning factors which weaken the profit's foundation.

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Examining Cashflow Against Tohokushinsha Film's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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. 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 March 2025, Tohokushinsha Film had an accrual ratio of 0.29. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥259m despite its profit of JP¥8.36b, mentioned above. It's worth noting that Tohokushinsha Film generated positive FCF of JP¥5.5b a year ago, so at least they've done it in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. One positive for Tohokushinsha Film 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.

View our latest analysis for Tohokushinsha Film

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by JP¥9.2b, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Tohokushinsha Film's positive unusual items were quite significant relative to its profit in the year to March 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Tohokushinsha Film's Profit Performance

Summing up, Tohokushinsha Film received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Tohokushinsha Film's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Tohokushinsha Film, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Tohokushinsha Film, and understanding them should be part of your investment process.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.