We Think KUWAZAWA Holdings' (TSE:8104) Healthy Earnings Might Be Conservative

The stock was sluggish on the back of KUWAZAWA Holdings Corporation's (TSE:8104) recent earnings report. Our analysis suggests that there are some reasons for hope that investors should be aware of.

Our free stock report includes 2 warning signs investors should be aware of before investing in KUWAZAWA Holdings. Read for free now.

A Closer Look At KUWAZAWA Holdings' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2025, KUWAZAWA Holdings had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of JP¥2.2b during the period, dwarfing its reported profit of JP¥747.0m. Notably, KUWAZAWA Holdings had negative free cash flow last year, so the JP¥2.2b it produced this year was a welcome improvement. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for KUWAZAWA Holdings

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

How Do Unusual Items Influence Profit?

KUWAZAWA Holdings' profit was reduced by unusual items worth JP¥543m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect KUWAZAWA Holdings to produce a higher profit next year, all else being equal.

Our Take On KUWAZAWA Holdings' Profit Performance

In conclusion, both KUWAZAWA Holdings' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Looking at all these factors, we'd say that KUWAZAWA Holdings' underlying earnings power is at least as good as the statutory numbers would make it seem. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 2 warning signs for KUWAZAWA Holdings you should be aware of.

Our examination of KUWAZAWA Holdings has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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.