We Think You Can Look Beyond TOBA's (TSE:7472) Lackluster Earnings
Shareholders appeared unconcerned with TOBA, INC.'s (TSE:7472) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.
A Closer Look At TOBA'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
TOBA has an accrual ratio of -0.36 for the year to September 2026. 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¥4.9b in the last year, which was a lot more than its statutory profit of JP¥1.29b. TOBA shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TOBA.
Our Take On TOBA's Profit Performance
Happily for shareholders, TOBA produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that TOBA's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 5.4% per year over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 3 warning signs for TOBA (1 makes us a bit uncomfortable!) and we strongly recommend you look at these before investing.
This note has only looked at a single factor that sheds light on the nature of TOBA'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. 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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