Aoyama Zaisan Networks CompanyLimited's (TSE:8929) Solid Earnings Have Been Accounted For Conservatively

Shareholders appeared to be happy with Aoyama Zaisan Networks Company,Limited's (TSE:8929) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

Check out our latest analysis for Aoyama Zaisan Networks CompanyLimited

Examining Cashflow Against Aoyama Zaisan Networks CompanyLimited'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. 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 December 2024, Aoyama Zaisan Networks CompanyLimited had an accrual ratio of -1.45. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of JP¥6.6b, well over the JP¥2.43b it reported in profit. Aoyama Zaisan Networks CompanyLimited's free cash flow improved over the last year, which is generally good to see.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Aoyama Zaisan Networks CompanyLimited's Profit Performance

As we discussed above, Aoyama Zaisan Networks CompanyLimited's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Aoyama Zaisan Networks CompanyLimited's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 63% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Aoyama Zaisan Networks CompanyLimited as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Aoyama Zaisan Networks CompanyLimited you should know about.

Today we've zoomed in on a single data point to better understand the nature of Aoyama Zaisan Networks CompanyLimited'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. 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.