The Strong Earnings Posted By Pro-Ship (TSE:3763) Are A Good Indication Of The Strength Of The Business

Even though Pro-Ship Incorporated (TSE:3763 ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.

View our latest analysis for Pro-Ship

Examining Cashflow Against Pro-Ship's 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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Pro-Ship has an accrual ratio of -0.19 for the year to September 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of JP¥1.6b during the period, dwarfing its reported profit of JP¥1.48b. Pro-Ship's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pro-Ship.

Our Take On Pro-Ship's Profit Performance

Happily for shareholders, Pro-Ship produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Pro-Ship's statutory profit actually understates its earnings potential! And the EPS is up 20% annually, 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. We've done some analysis and you can see our take on Pro-Ship's balance sheet by clicking here.

Today we've zoomed in on a single data point to better understand the nature of Pro-Ship'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 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.