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华尔街日报Care Twentyone's (TSE:2373) Solid Earnings Are Supported By Other Strong Factors
Care Twentyone Corporation's (TSE:2373) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.
Examining Cashflow Against Care Twentyone's Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.
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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Care Twentyone has an accrual ratio of -0.14 for the year to October 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of JP¥1.9b in the last year, which was a lot more than its statutory profit of JP¥384.0m. Given that Care Twentyone had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥1.9b would seem to be a step in the right direction. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
View our latest analysis for Care Twentyone
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Care Twentyone.
The Impact Of Unusual Items On Profit
Surprisingly, given Care Twentyone's accrual ratio implied strong cash conversion, its paper profit was actually boosted by JP¥125m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Care Twentyone doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Our Take On Care Twentyone's Profit Performance
In conclusion, Care Twentyone's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Given the contrasting considerations, we don't have a strong view as to whether Care Twentyone's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into Care Twentyone, you'd also look into what risks it is currently facing. For instance, we've identified 6 warning signs for Care Twentyone (3 are potentially serious) you should be familiar with.
Our examination of Care Twentyone has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.