We Think Suido Kiko Kaisha's (TSE:6403) Healthy Earnings Might Be Conservative

Investors signalled that they were pleased with Suido Kiko Kaisha, Ltd.'s (TSE:6403) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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Examining Cashflow Against Suido Kiko Kaisha's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 2025, Suido Kiko Kaisha recorded an accrual ratio of -0.26. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of JP¥2.7b during the period, dwarfing its reported profit of JP¥427.0m. Given that Suido Kiko Kaisha had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥2.7b would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Suido Kiko Kaisha.

Our Take On Suido Kiko Kaisha's Profit Performance

As we discussed above, Suido Kiko Kaisha's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Suido Kiko Kaisha's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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. While conducting our analysis, we found that Suido Kiko Kaisha has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Suido Kiko Kaisha's 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. 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.