We Think You Should Be Aware Of Some Concerning Factors In International Conglomerate of Distribution for Automobile Holdings' (TSE:3184) Earnings

International Conglomerate of Distribution for Automobile Holdings Co., Ltd.'s (TSE:3184) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for International Conglomerate of Distribution for Automobile Holdings

Examining Cashflow Against International Conglomerate of Distribution for Automobile Holdings' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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'.

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 March 2024, International Conglomerate of Distribution for Automobile Holdings had an accrual ratio of 0.24. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of JP¥930.0m, a look at free cash flow indicates it actually burnt through JP¥1.6b in the last year. It's worth noting that International Conglomerate of Distribution for Automobile Holdings generated positive FCF of JP¥876m a year ago, so at least they've done it in the past. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of International Conglomerate of Distribution for Automobile Holdings.

The Impact Of Unusual Items On Profit

International Conglomerate of Distribution for Automobile Holdings' profit suffered from unusual items, which reduced profit by JP¥282m in the last twelve months. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If International Conglomerate of Distribution for Automobile Holdings doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On International Conglomerate of Distribution for Automobile Holdings' Profit Performance

In conclusion, International Conglomerate of Distribution for Automobile Holdings' accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Given the contrasting considerations, we don't have a strong view as to whether International Conglomerate of Distribution for Automobile Holdings's profits are an apt reflection of its underlying potential for profit. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that International Conglomerate of Distribution for Automobile Holdings is showing 3 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

Our examination of International Conglomerate of Distribution for Automobile Holdings has focussed on certain factors that can make its earnings look better than they are. 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.