Century21 Real Estate of Japan's (TSE:8898) Performance Is Even Better Than Its Earnings Suggest

Even though Century21 Real Estate of Japan Ltd's (TSE:8898) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

View our latest analysis for Century21 Real Estate of Japan

Examining Cashflow Against Century21 Real Estate of Japan's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Over the twelve months to September 2024, Century21 Real Estate of Japan recorded an accrual ratio of -0.16. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥963m during the period, dwarfing its reported profit of JP¥784.0m. Century21 Real Estate of Japan's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Century21 Real Estate of Japan.

Our Take On Century21 Real Estate of Japan's Profit Performance

Century21 Real Estate of Japan's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Century21 Real Estate of Japan's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 16% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 1 warning sign for Century21 Real Estate of Japan you should know about.

Today we've zoomed in on a single data point to better understand the nature of Century21 Real Estate of Japan's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.