We Like The Quality Of halmek holdingsLtd's (TSE:7119) Earnings

Shareholders appeared to be happy with halmek holdings Co.,Ltd.'s (TSE:7119) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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Examining Cashflow Against halmek holdingsLtd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 June 2025, halmek holdingsLtd had an accrual ratio of -0.19. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥2.2b during the period, dwarfing its reported profit of JP¥619.0m. Given that halmek holdingsLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥2.2b would seem to be a step in the right direction. 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.

See our latest analysis for halmek holdingsLtd

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

The Impact Of Unusual Items On Profit

halmek holdingsLtd's profit was reduced by unusual items worth JP¥238m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect halmek holdingsLtd to produce a higher profit next year, all else being equal.

Our Take On halmek holdingsLtd's Profit Performance

In conclusion, both halmek holdingsLtd's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. After considering all this, we reckon halmek holdingsLtd's statutory profit probably understates its earnings potential! With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 2 warning signs we've spotted with halmek holdingsLtd (including 1 which is concerning).

After our examination into the nature of halmek holdingsLtd's profit, we've come away optimistic for the company. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.