The Strong Earnings Posted By Cross Marketing Group (TSE:3675) Are A Good Indication Of The Strength Of The Business

Investors were underwhelmed by the solid earnings posted by Cross Marketing Group Inc. (TSE:3675) recently. We did some digging and actually think they are being unnecessarily pessimistic.

Check out our latest analysis for Cross Marketing Group

Zooming In On Cross Marketing Group'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 December 2024, Cross Marketing Group had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of JP¥2.0b, well over the JP¥1.39b it reported in profit. Cross Marketing Group'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 Cross Marketing Group.

Our Take On Cross Marketing Group's Profit Performance

As we discussed above, Cross Marketing Group has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Cross Marketing Group's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 13% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Cross Marketing Group has 3 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Cross Marketing Group'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. 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.