NTT Data Intramart's (TSE:3850) Shareholders Have More To Worry About Than Lackluster Earnings

Investors were disappointed with NTT Data Intramart Corporation's (TSE:3850) recent earnings. We think that they may have more to worry about than just soft profit numbers.

View our latest analysis for NTT Data Intramart

A Closer Look At NTT Data Intramart's Earnings

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

Over the twelve months to March 2024, NTT Data Intramart recorded an accrual ratio of 0.31. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of JP¥350.0m, a look at free cash flow indicates it actually burnt through JP¥240m in the last year. We also note that NTT Data Intramart's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥240m. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of NTT Data Intramart.

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by JP¥98m, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. If NTT Data Intramart doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On NTT Data Intramart's Profit Performance

NTT Data Intramart had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue NTT Data Intramart's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing NTT Data Intramart at this point in time. For instance, we've identified 4 warning signs for NTT Data Intramart (2 are a bit unpleasant) you should be familiar with.

Our examination of NTT Data Intramart has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.