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New Risk • Jun 16

New major risk - Earnings quality

The company has a high level of non-cash earnings. Accrual ratio: 22% This is considered a major risk. Non-cash earnings can arise from many different things. However, if a company consistently has a high level of non-cash earnings, it may be a sign that they are recognizing revenue from customers before the full value of the sales are received as cash or they are not depreciating the value of their assets appropriately. These are practices that inflate earnings, while not providing a similar increase to cash flows. Companies in some select industries naturally have a high level of non-cash earnings and it is not a major concern. However, in the worst case scenario it can be an early sign of performance manipulation by management. Currently, the following risks have been identified for the company: Major Risk High level of non-cash earnings (22% accrual ratio). Minor Risks Profit margins are more than 30% lower than last year (16% net profit margin). Market cap is less than US$100m (JP¥13.6b market cap, or US$85.1m).

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gumi's (TSE:3903) Sluggish Earnings Might Be Just The Beginning Of Its Problems

New major risk - Earnings quality

New minor risk - Profit margin trend

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