NIFTY Lifestyle's (TSE:4262) Performance Is Even Better Than Its Earnings Suggest

The subdued stock price reaction suggests that NIFTY Lifestyle Co., Ltd.'s (TSE:4262) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for NIFTY Lifestyle

Examining Cashflow Against NIFTY Lifestyle'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 September 2024, NIFTY Lifestyle had an accrual ratio of -0.13. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of JP¥756m during the period, dwarfing its reported profit of JP¥600.0m. NIFTY Lifestyle'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 NIFTY Lifestyle.

Our Take On NIFTY Lifestyle's Profit Performance

As we discussed above, NIFTY Lifestyle has perfectly satisfactory free cash flow relative to profit. Because of this, we think NIFTY Lifestyle's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 54% over 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 1 warning sign for NIFTY Lifestyle you should know about.

Today we've zoomed in on a single data point to better understand the nature of NIFTY Lifestyle's profit. 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.