Daihatsu Infinearth Mfg.Co.Ltd's (TSE:6023) Profits Appear To Have Quality Issues
Daihatsu Infinearth Mfg.Co.,Ltd (TSE:6023) just released a solid earnings report, and the stock displayed some strength. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.
Zooming In On Daihatsu Infinearth Mfg.Co.Ltd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. 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 March 2026, Daihatsu Infinearth Mfg.Co.Ltd had an accrual ratio of 0.20. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of JP¥2.5b, in contrast to the aforementioned profit of JP¥5.92b. It's worth noting that Daihatsu Infinearth Mfg.Co.Ltd generated positive FCF of JP¥2.8b a year ago, so at least they've done it in the past.
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 Daihatsu Infinearth Mfg.Co.Ltd's Profit Performance
Daihatsu Infinearth Mfg.Co.Ltd's 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 Daihatsu Infinearth Mfg.Co.Ltd's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Daihatsu Infinearth Mfg.Co.Ltd, you'd also look into what risks it is currently facing. For instance, we've identified 4 warning signs for Daihatsu Infinearth Mfg.Co.Ltd (2 can't be ignored) you should be familiar with.
Today we've zoomed in on a single data point to better understand the nature of Daihatsu Infinearth Mfg.Co.Ltd'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.