THine Electronics (TSE:6769) Shareholders Should Be Cautious Despite Solid Earnings

The healthy profit announcement from THine Electronics, Inc. (TSE:6769 ) didn't seem to impress investors. Our analysis has found some underlying factors which may be cause for concern.

See our latest analysis for THine Electronics

A Closer Look At THine Electronics' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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 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.

THine Electronics has an accrual ratio of 0.22 for the year to December 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥145m despite its profit of JP¥339.0m, mentioned above. We saw that FCF was JP¥286m a year ago though, so THine Electronics has at least been able to generate positive FCF 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. One positive for THine Electronics shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that THine Electronics' profit was boosted by unusual items worth JP¥137m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that THine Electronics' positive unusual items were quite significant relative to its profit in the year to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On THine Electronics' Profit Performance

Summing up, THine Electronics received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue THine Electronics' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into THine Electronics, you'd also look into what risks it is currently facing. When we did our research, we found 2 warning signs for THine Electronics (1 is significant!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.