We Like The Quality Of Ascentech K.K's (TSE:3565) Earnings

Despite posting healthy earnings, Ascentech K.K.'s (TSE:3565 ) stock has been quite weak. Along with the solid headline numbers, we think that investors have some reasons for optimism.

View our latest analysis for Ascentech K.K

Examining Cashflow Against Ascentech K.K's 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 January 2024, Ascentech K.K recorded an accrual ratio of -0.79. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of JP¥827m in the last year, which was a lot more than its statutory profit of JP¥480.0m. Unfortunately, we don't have data on Ascentech K.K's free cash flow for the prior year; that's not necessarily a bad thing, though we do generally prefer to be able to see a bit of a company's history.

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

Our Take On Ascentech K.K's Profit Performance

As we discussed above, Ascentech K.K's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Ascentech K.K's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 3 warning signs for Ascentech K.K and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Ascentech K.K's profit. 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 that insiders are buying 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.