There May Be Underlying Issues With The Quality Of Nittetsu Mining’s (TSE:1515) Earnings
Despite posting some strong earnings, the market for Nittetsu Mining Co., Ltd.’s (TSE:1515) stock hasn’t moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
Examining Cashflow Against Nittetsu Mining’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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to March 2026, Nittetsu Mining had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of JP¥14.0b, a look at free cash flow indicates it actually burnt through JP¥25b in the last year. It’s worth noting that Nittetsu Mining generated positive FCF of JP¥2.2b a year ago, so at least they’ve done it in the past. However, that’s not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
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Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nittetsu Mining.
How Do Unusual Items Influence Profit?
Given the accrual ratio, it’s not overly surprising that Nittetsu Mining’s profit was boosted by unusual items worth JP¥1.6b in the last twelve months. We can’t deny that higher profits generally leave us optimistic, but we’d prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don’t show up again in the current year, we’d thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On Nittetsu Mining’s Profit Performance
Summing up, Nittetsu Mining received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we’d argue Nittetsu Mining’s profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. To help with this, we’ve discovered 3 warning signs (2 don’t sit too well with us!) that you ought to be aware of before buying any shares in Nittetsu Mining.
In this article we’ve looked at a number of factors that can impair the utility of profit numbers, and we’ve come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.
