RentracksLTD's (TSE:6045) Earnings Seem To Be Promising

The market seemed underwhelmed by the solid earnings posted by Rentracks CO.,LTD. (TSE:6045) recently. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

Check out our latest analysis for RentracksLTD

Examining Cashflow Against RentracksLTD'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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 March 2024, RentracksLTD 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¥620m during the period, dwarfing its reported profit of JP¥339.0m. Notably, RentracksLTD had negative free cash flow last year, so the JP¥620m it produced this year was a welcome improvement. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

The Impact Of Unusual Items On Profit

RentracksLTD's profit was reduced by unusual items worth JP¥150m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect RentracksLTD to produce a higher profit next year, all else being equal.

Our Take On RentracksLTD's Profit Performance

Considering both RentracksLTD's accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. Looking at all these factors, we'd say that RentracksLTD's underlying earnings power is at least as good as the statutory numbers would make it seem. If you want to do dive deeper into RentracksLTD, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 4 warning signs for RentracksLTD you should know about.

Our examination of RentracksLTD has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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.