Despite strong numbers, the market seemed underwhelmed by Tokyo Tutoring Academy Co., Ltd. (TSE: 4745) last week’s earnings report. We did some analysis to find out why, and we think investors may be missing some encouraging factors in the earnings.
Check out our latest analysis for Tokyo Individual Guidance Academy.
TSE: 4745 Performance trends October 18, 2024
Take a closer look at Tokyo Individualized Guidance Academy’s achievements
In high finance, the key ratio used to measure how well a company converts its reported profits into free cash flow (FCF) is the accrual ratio (from cash flow). To find the accrual rate, first subtract the FCF from the period’s earnings, then divide that number by the period’s average operating assets. This ratio indicates how much of a company’s profits are not backed by free cash flow.
So a negative accrual rate is a good thing. Because it shows that a company is bringing in more free cash flow than it shows in profits. Although an accrual ratio greater than zero is rarely a problem, it may be considered noteworthy if a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek: “Firms with higher accruals tend to have lower future earnings.”
Tokyo Individualized Guidance Academy’s savings rate for the year ending August 2024 was -0.35. Therefore, its statutory earnings are significantly less than its free cash flow. In fact, last year’s free cash flow was 1.8 billion yen, far exceeding the statutory profit of 1.07 billion yen. Tokyo Tutoring Academy shareholders will no doubt be pleased to see that free cash flow improved over the last twelve months.
With that in mind, you might wonder what analysts are predicting 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 Tokyo Individualized Guidance Academy’s profit performance
Fortunately for shareholders, Tokyo Tutoring Academy generated sufficient free cash flow to support its statutory profit figures. Therefore, we believe that Tokyo Tutoring Academy’s potential earnings are equal to, or even higher than, its statutory profits. The purpose of this article was to assess how well we can rely on statutory earnings to reflect a company’s potential, but there’s plenty more to consider. So, while the quality of earnings is important, it’s equally important to consider the risks facing Tokyo Tutoring Academy at the moment. For example, Tokyo Tutoring Academy has 2 warning signs we think you should be aware of (and 1 shouldn’t ignore).
Today, we’ve focused on a single data point to better understand the nature of Tokyo Tutoring Academy’s profits. But if you can focus your attention on the details, there is always more to discover. Some consider a high return on equity to be a good sign of a high-quality business. It might require a little research on your behalf, but you might find this free collection of companies boasting high return on equity , or this list of stocks with significant insider ownership to be useful.
Evaluation is complex, but we will simplify it here.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
