We Like The Quality Of Village VanguardLTD's (TSE:2769) Earnings
The market seemed underwhelmed by last week's earnings announcement from Village Vanguard CO.,LTD. (TSE:2769) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.
A Closer Look At Village VanguardLTD'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. 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. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Village VanguardLTD has an accrual ratio of -0.14 for the year to May 2026. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of JP¥1.9b during the period, dwarfing its reported profit of JP¥736.0m. Village VanguardLTD 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 Village VanguardLTD.
Our Take On Village VanguardLTD's Profit Performance
Village VanguardLTD's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Village VanguardLTD's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 2 warning signs for Village VanguardLTD (1 makes us a bit uncomfortable) you should be familiar with.
This note has only looked at a single factor that sheds light on the nature of Village VanguardLTD's profit. 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. 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.