Statutory Profit Doesn't Reflect How Good Terilogy Holdings' (TSE:5133) Earnings Are

Terilogy Holdings Corporation (TSE:5133) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

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A Closer Look At Terilogy Holdings' 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). 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2025, Terilogy Holdings had an accrual ratio of -0.88. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of JP¥952m in the last year, which was a lot more than its statutory profit of JP¥346.0m. Notably, Terilogy Holdings had negative free cash flow last year, so the JP¥952m it produced this year was a welcome improvement.

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

Our Take On Terilogy Holdings' Profit Performance

Happily for shareholders, Terilogy Holdings produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Terilogy Holdings' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 1 warning sign for Terilogy Holdings you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Terilogy Holdings' 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.