MINATO HOLDINGS' (TSE:6862) Weak Earnings May Only Reveal A Part Of The Whole Picture

Despite MINATO HOLDINGS INC.'s (TSE:6862) recent earnings report having lackluster headline numbers, the market responded positively. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for MINATO HOLDINGS.

See our latest analysis for MINATO HOLDINGS

A Closer Look At MINATO HOLDINGS' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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

For the year to September 2024, MINATO HOLDINGS had an accrual ratio of 0.44. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of JP¥423.0m, a look at free cash flow indicates it actually burnt through JP¥4.2b in the last year. We saw that FCF was JP¥1.7b a year ago though, so MINATO HOLDINGS has at least been able to generate positive FCF in the past. One positive for MINATO HOLDINGS shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On MINATO HOLDINGS' Profit Performance

As we discussed above, we think MINATO HOLDINGS' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that MINATO HOLDINGS' underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into MINATO HOLDINGS, you'd also look into what risks it is currently facing. Be aware that MINATO HOLDINGS is showing 6 warning signs in our investment analysis and 3 of those are a bit concerning...

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