Goodpatch's (TSE:7351) Strong Earnings Are Of Good Quality

Goodpatch, Inc.'s (TSE:7351) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

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Examining Cashflow Against Goodpatch'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 February 2025, Goodpatch recorded an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of JP¥307m during the period, dwarfing its reported profit of JP¥200.0m. Goodpatch'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 Goodpatch.

Our Take On Goodpatch's Profit Performance

As we discussed above, Goodpatch has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Goodpatch's statutory profit actually understates its earnings potential! And the EPS is up 25% over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Goodpatch as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Goodpatch (including 2 which are a bit concerning).

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