We Think SHINKO's (TSE:7120) Profit Is Only A Baseline For What They Can Achieve

The subdued stock price reaction suggests that SHINKO Inc.'s (TSE:7120) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

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A Closer Look At SHINKO's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.

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.

Over the twelve months to March 2025, SHINKO recorded an accrual ratio of -0.77. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥751m in the last year, which was a lot more than its statutory profit of JP¥512.0m. SHINKO did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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

Our Take On SHINKO's Profit Performance

Happily for shareholders, SHINKO produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that SHINKO's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 20% per year 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for SHINKO and we think they deserve your attention.

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