We Think You Can Look Beyond Daiko Denshi Tsushin's (TSE:8023) Lackluster Earnings

The market for Daiko Denshi Tsushin, Ltd.'s (TSE:8023) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Daiko Denshi Tsushin

Zooming In On Daiko Denshi Tsushin's 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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

For the year to September 2024, Daiko Denshi Tsushin had an accrual ratio of -0.18. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of JP¥2.3b in the last year, which was a lot more than its statutory profit of JP¥1.53b. Daiko Denshi Tsushin'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 Daiko Denshi Tsushin.

Our Take On Daiko Denshi Tsushin's Profit Performance

Happily for shareholders, Daiko Denshi Tsushin produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Daiko Denshi Tsushin's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in 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 want to do dive deeper into Daiko Denshi Tsushin, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Daiko Denshi Tsushin (of which 1 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Daiko Denshi Tsushin's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.