Earnings Troubles May Signal Larger Issues for Ishikawa Seisakusho (TSE:6208) Shareholders

Investors weren't pleased with the recent soft earnings report from Ishikawa Seisakusho, Ltd. (TSE:6208). Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

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A Closer Look At Ishikawa Seisakusho'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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.

Ishikawa Seisakusho has an accrual ratio of 0.30 for the year to September 2025. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of JP¥4.1b, in contrast to the aforementioned profit of JP¥345.0m. We also note that Ishikawa Seisakusho's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥4.1b. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

View our latest analysis for Ishikawa Seisakusho

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ishikawa Seisakusho.

How Do Unusual Items Influence Profit?

Unfortunately (in the short term) Ishikawa Seisakusho saw its profit reduced by unusual items worth JP¥172m. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Ishikawa Seisakusho doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Ishikawa Seisakusho's Profit Performance

In conclusion, Ishikawa Seisakusho's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, we think it's very unlikely that Ishikawa Seisakusho's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Ishikawa Seisakusho at this point in time. To that end, you should learn about the 5 warning signs we've spotted with Ishikawa Seisakusho (including 2 which are a bit concerning).

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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. 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.