Toyota Boshoku's (TSE:3116) Solid Earnings Have Been Accounted For Conservatively
Despite posting healthy earnings, Toyota Boshoku Corporation's (TSE:3116 ) stock has been quite weak. Along with the solid headline numbers, we think that investors have some reasons for optimism.
Examining Cashflow Against Toyota Boshoku's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Toyota Boshoku has an accrual ratio of -0.14 for the year to June 2026. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of JP¥78b, well over the JP¥21.2b it reported in profit. Toyota Boshoku shareholders are no doubt pleased that free cash flow improved over the last twelve months.
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 Toyota Boshoku's Profit Performance
Toyota Boshoku's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Toyota Boshoku's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 13% in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 1 warning sign for Toyota Boshoku you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Toyota Boshoku's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.