SYS Holdings' (TSE:3988) Solid Earnings Are Supported By Other Strong Factors

When companies post strong earnings, the stock generally performs well, just like SYS Holdings Co., Ltd.'s (TSE:3988) stock has recently. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for SYS Holdings

A Closer Look At SYS Holdings' 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. 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'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. 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 July 2024, SYS Holdings had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of JP¥602m, well over the JP¥471.0m it reported in profit. SYS Holdings' 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 SYS Holdings.

Our Take On SYS Holdings' Profit Performance

As we discussed above, SYS Holdings has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that SYS Holdings' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 68% per year over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - SYS Holdings has 2 warning signs we think you should be aware of.

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