Solid Earnings Reflect Digital Media Professionals' (TSE:3652) Strength As A Business

Even though Digital Media Professionals Inc. (TSE:3652 ) posted strong earnings, investors appeared to be underwhelmed. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Digital Media Professionals

Examining Cashflow Against Digital Media Professionals' 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). 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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2024, Digital Media Professionals had an accrual ratio of -0.64. 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¥633m in the last year, which was a lot more than its statutory profit of JP¥331.0m. Given that Digital Media Professionals had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥633m would seem to be a step in the right direction.

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

Our Take On Digital Media Professionals' Profit Performance

As we discussed above, Digital Media Professionals' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Digital Media Professionals' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Digital Media Professionals as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Digital Media Professionals (including 1 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of Digital Media Professionals' profit. But there are plenty of other ways to inform your opinion of a company. 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.