We Think ToubujyuhanLtd's (TSE:3297) Profit Is Only A Baseline For What They Can Achieve

The subdued stock price reaction suggests that Toubujyuhan Co.,Ltd.'s (TSE:3297) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

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

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to May 2025, ToubujyuhanLtd had an accrual ratio of -0.15. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of JP¥1.0b in the last year, which was a lot more than its statutory profit of JP¥343.0m. Notably, ToubujyuhanLtd had negative free cash flow last year, so the JP¥1.0b it produced this year was a welcome improvement.

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

Our Take On ToubujyuhanLtd's Profit Performance

ToubujyuhanLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that ToubujyuhanLtd's statutory profit actually understates its earnings potential! And the EPS is up 62% over the last twelve months. 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 while earnings quality is important, it's equally important to consider the risks facing ToubujyuhanLtd at this point in time. When we did our research, we found 2 warning signs for ToubujyuhanLtd (1 is a bit unpleasant!) that we believe deserve your full attention.

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