We Think Nippon BS Broadcasting's (TSE:9414) Solid Earnings Are Understated

Nippon BS Broadcasting Corporation's (TSE:9414) solid earnings announcement recently didn't do much to the stock price. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Nippon BS Broadcasting

Examining Cashflow Against Nippon BS Broadcasting'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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 August 2024, Nippon BS Broadcasting had an accrual ratio of -0.10. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of JP¥2.4b in the last year, which was a lot more than its statutory profit of JP¥1.46b. Given that Nippon BS Broadcasting had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥2.4b would seem to be a step in the right direction.

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

Our Take On Nippon BS Broadcasting's Profit Performance

Nippon BS Broadcasting's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Nippon BS Broadcasting's earnings potential is at least as good as it seems, and maybe even better! The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 2 warning signs for Nippon BS Broadcasting you should be mindful of and 1 of them is concerning.

Today we've zoomed in on a single data point to better understand the nature of Nippon BS Broadcasting'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. 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.