SBI Leasing Services' (TSE:5834) Earnings Are Of Questionable Quality

Despite announcing strong earnings, SBI Leasing Services Co., Ltd.'s (TSE:5834) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

View our latest analysis for SBI Leasing Services

A Closer Look At SBI Leasing Services' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, SBI Leasing Services recorded an accrual ratio of 0.71. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥27b despite its profit of JP¥3.45b, mentioned above. We also note that SBI Leasing Services' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥27b.

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 SBI Leasing Services' Profit Performance

As we discussed above, we think SBI Leasing Services' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that SBI Leasing Services' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 34% 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. If you'd like to know more about SBI Leasing Services as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for SBI Leasing Services you should know about.

Today we've zoomed in on a single data point to better understand the nature of SBI Leasing Services' profit. 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. 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 that insiders are buying 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.