Nippon Ski Resort DevelopmentLtd's (TSE:6040) Earnings Are Of Questionable Quality

Nippon Ski Resort Development Co.,Ltd.'s (TSE:6040) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Nippon Ski Resort DevelopmentLtd

A Closer Look At Nippon Ski Resort DevelopmentLtd'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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to January 2024, Nippon Ski Resort DevelopmentLtd had an accrual ratio of 0.39. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of JP¥1.05b, a look at free cash flow indicates it actually burnt through JP¥1.2b in the last year. It's worth noting that Nippon Ski Resort DevelopmentLtd generated positive FCF of JP¥477m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nippon Ski Resort DevelopmentLtd.

Our Take On Nippon Ski Resort DevelopmentLtd's Profit Performance

As we discussed above, we think Nippon Ski Resort DevelopmentLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Nippon Ski Resort DevelopmentLtd's underlying earnings power is lower than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 1 warning sign for Nippon Ski Resort DevelopmentLtd you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Nippon Ski Resort DevelopmentLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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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.