We Think Pharma Foods International's (TSE:2929) Solid Earnings Are Understated

Despite posting healthy earnings, Pharma Foods International Co., Ltd.'s (TSE:2929 ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

See our latest analysis for Pharma Foods International

Examining Cashflow Against Pharma Foods International'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. 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Pharma Foods International has an accrual ratio of -0.11 for the year to July 2024. 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¥4.6b during the period, dwarfing its reported profit of JP¥3.21b. Pharma Foods International did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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

Our Take On Pharma Foods International's Profit Performance

Pharma Foods International's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Pharma Foods International's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 5.6% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 1 warning sign for Pharma Foods International and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of Pharma Foods International's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.