TENDALTD (TSE:4198) Is Posting Promising Earnings But The Good News Doesn’t Stop There

The stock was sluggish on the back of TENDA Co.,LTD.'s (TSE:4198) recent earnings report. Our analysis suggests that there are some reasons for hope that investors should be aware of.

See our latest analysis for TENDALTD

Examining Cashflow Against TENDALTD'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. 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.

TENDALTD has an accrual ratio of -0.14 for the year to November 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of JP¥506m during the period, dwarfing its reported profit of JP¥394.0m. Over the last year, TENDALTD's free cash flow remained steady.

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

Our Take On TENDALTD's Profit Performance

As we discussed above, TENDALTD has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that TENDALTD's statutory profit actually understates its earnings potential! And the EPS is up 64% 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. 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 2 warning signs for TENDALTD and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of TENDALTD's 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.