Nippon Ski Resort DevelopmentLtd's (TSE:6040) Solid Earnings May Rest On Weak Foundations

The market shrugged off Nippon Ski Resort Development Co.,Ltd.'s (TSE:6040) solid earnings report. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Nippon Ski Resort DevelopmentLtd

A Closer Look At Nippon Ski Resort DevelopmentLtd'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. 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. 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 2025, Nippon Ski Resort DevelopmentLtd had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥515m despite its profit of JP¥1.38b, mentioned above. We also note that Nippon Ski Resort DevelopmentLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥515m.

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

Nippon Ski Resort DevelopmentLtd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Nippon Ski Resort DevelopmentLtd's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 31% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Nippon Ski Resort DevelopmentLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Nippon Ski Resort DevelopmentLtd you should be mindful of and 1 of them is concerning.

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. 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.