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Sun-Wa Technos (TSE:8137) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of
Last week's profit announcement from Sun-Wa Technos Corporation (TSE:8137) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.
Examining Cashflow Against Sun-Wa Technos' Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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 2026, Sun-Wa Technos had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥4.9b despite its profit of JP¥4.28b, mentioned above. We saw that FCF was JP¥7.1b a year ago though, so Sun-Wa Technos has at least been able to generate positive FCF in the past. The good news for shareholders is that Sun-Wa Technos' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sun-Wa Technos.
Our Take On Sun-Wa Technos' Profit Performance
Sun-Wa Technos' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Sun-Wa Technos' true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 75% in the last year. 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. 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. For example, we've found that Sun-Wa Technos has 3 warning signs (2 are concerning!) that deserve your attention before going any further with your analysis.
This note has only looked at a single factor that sheds light on the nature of Sun-Wa Technos' 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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