Shareholders Can Be Confident That PBsystemsInc's (TSE:4447) Earnings Are High Quality

Even though PBsystems,Inc.'s (TSE:4447) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for PBsystemsInc

A Closer Look At PBsystemsInc'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. 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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, PBsystemsInc recorded an accrual ratio of -1.08. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥576m in the last year, which was a lot more than its statutory profit of JP¥328.0m. PBsystemsInc shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On PBsystemsInc's Profit Performance

Happily for shareholders, PBsystemsInc produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that PBsystemsInc's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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. If you'd like to know more about PBsystemsInc as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for PBsystemsInc you should know about.

This note has only looked at a single factor that sheds light on the nature of PBsystemsInc's profit. 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. 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.