Broad EnterpriseLtd's (TSE:4415) Profits Appear To Have Quality Issues

The stock price didn't jump after Broad Enterprise Co.,Ltd. (TSE:4415) posted decent earnings last week. We think that investors might be worried about some concerning underlying factors.

View our latest analysis for Broad EnterpriseLtd

Zooming In On Broad EnterpriseLtd's 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 December 2024, Broad EnterpriseLtd recorded an accrual ratio of 0.49. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥1.1b despite its profit of JP¥346.0m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥1.1b, this year, indicates high risk.

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

Our Take On Broad EnterpriseLtd's Profit Performance

As we have made quite clear, we're a bit worried that Broad EnterpriseLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Broad EnterpriseLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. And we are pleased to note that EPS is at least heading in the right direction in the alst 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'd like to know more about Broad EnterpriseLtd as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Broad EnterpriseLtd you should be mindful of and 2 of these can't be ignored.

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