There May Be Some Bright Spots In Computer Management's (TSE:4491) Earnings

Computer Management Co., Ltd.'s (TSE:4491) stock was strong despite it releasing a soft earnings report last week. However, we think the company is showing some signs that things are more promising than they seem.

Check out our latest analysis for Computer Management

Zooming In On Computer Management'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). 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Computer Management has an accrual ratio of -0.28 for the year to March 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥406m during the period, dwarfing its reported profit of JP¥327.0m. Computer Management'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 Computer Management.

Our Take On Computer Management's Profit Performance

As we discussed above, Computer Management's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Computer Management's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 14% annually, over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Computer Management at this point in time. You'd be interested to know, that we found 2 warning signs for Computer Management and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of Computer Management'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. 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.