Aisan TechnologyLtd's (TSE:4667) Soft Earnings Are Actually Better Than They Appear

The market for Aisan Technology Co.,Ltd.'s (TSE:4667) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Our free stock report includes 1 warning sign investors should be aware of before investing in Aisan TechnologyLtd. Read for free now.

A Closer Look At Aisan TechnologyLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

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.

Aisan TechnologyLtd has an accrual ratio of -0.19 for the year to March 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥722m during the period, dwarfing its reported profit of JP¥286.0m. Given that Aisan TechnologyLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥722m would seem to be a step in the right direction.

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

Our Take On Aisan TechnologyLtd's Profit Performance

As we discussed above, Aisan TechnologyLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Aisan TechnologyLtd's statutory profit actually understates its earnings potential! And the EPS is up 45% 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Aisan TechnologyLtd, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Aisan TechnologyLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.