Shareholders In Japan Ecosystem (TSE:9249) Should Look Beyond Earnings For The Full Story

We didn't see Japan Ecosystem Co., Ltd.'s (TSE:9249) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

We've discovered 3 warning signs about Japan Ecosystem. View them for free.

Examining Cashflow Against Japan Ecosystem'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). 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. 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 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, Japan Ecosystem had an accrual ratio of 0.60. 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¥3.7b despite its profit of JP¥939.0m, mentioned above. We saw that FCF was JP¥148m a year ago though, so Japan Ecosystem has at least been able to generate positive FCF in the past. 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 Japan Ecosystem

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Japan Ecosystem's profit was boosted by unusual items worth JP¥366m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Japan Ecosystem had a rather significant contribution from unusual items relative to its profit to March 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Japan Ecosystem's Profit Performance

Summing up, Japan Ecosystem received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. On reflection, the above-mentioned factors give us the strong impression that Japan Ecosystem'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you'd like to know more about Japan Ecosystem as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Japan Ecosystem (2 make us uncomfortable) you should be familiar with.

Our examination of Japan Ecosystem has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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 with significant insider holdings 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.