SpacemarketInc's (TSE:4487) Earnings Are Of Questionable Quality

Investors were disappointed with Spacemarket,Inc.'s (TSE:4487) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.

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Examining Cashflow Against SpacemarketInc's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

SpacemarketInc has an accrual ratio of 0.78 for the year to June 2025. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of JP¥73m during the period, falling well short of its reported profit of JP¥237.0m. SpacemarketInc shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for SpacemarketInc shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On SpacemarketInc's Profit Performance

As we have made quite clear, we're a bit worried that SpacemarketInc didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that SpacemarketInc's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. If you'd like to know more about SpacemarketInc as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for SpacemarketInc you should be mindful of and 1 of them is a bit unpleasant.

This note has only looked at a single factor that sheds light on the nature of SpacemarketInc's profit. 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.