There May Be Underlying Issues With The Quality Of Nippon Ski Resort DevelopmentLtd's (TSE:6040) Earnings

Despite announcing strong earnings, Nippon Ski Resort Development Co.,Ltd.'s (TSE:6040) stock was sluggish. We did some digging and found some worrying underlying problems.

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Zooming In On 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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

Nippon Ski Resort DevelopmentLtd has an accrual ratio of 0.22 for the year to July 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of JP¥68m, in contrast to the aforementioned profit of JP¥1.59b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥68m, this year, indicates high risk.

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 didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Nippon Ski Resort DevelopmentLtd's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Nippon Ski Resort DevelopmentLtd, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Nippon Ski Resort DevelopmentLtd, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand 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.