Asmarq's (TSE:4197) Performance Is Even Better Than Its Earnings Suggest

Asmarq Co., Ltd. (TSE:4197) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Asmarq

A Closer Look At Asmarq'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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to November 2024, Asmarq had an accrual ratio of -0.51. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥315m in the last year, which was a lot more than its statutory profit of JP¥256.0m. Asmarq'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 Asmarq.

Our Take On Asmarq's Profit Performance

Happily for shareholders, Asmarq produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Asmarq's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 18% annually, over the last three years. 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. If you want to do dive deeper into Asmarq, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Asmarq you should be aware of.

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