Investors Can Find Comfort In RIDE ON EXPRESS HOLDINGS' (TSE:6082) Earnings Quality

Soft earnings didn't appear to concern RIDE ON EXPRESS HOLDINGS Co., Ltd.'s (TSE:6082) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for RIDE ON EXPRESS HOLDINGS

A Closer Look At RIDE ON EXPRESS HOLDINGS' 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. 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.

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 2024, RIDE ON EXPRESS HOLDINGS had an accrual ratio of -0.29. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥1.1b in the last year, which was a lot more than its statutory profit of JP¥364.0m. RIDE ON EXPRESS HOLDINGS shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

RIDE ON EXPRESS HOLDINGS' profit was reduced by unusual items worth JP¥319m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect RIDE ON EXPRESS HOLDINGS to produce a higher profit next year, all else being equal.

Our Take On RIDE ON EXPRESS HOLDINGS' Profit Performance

In conclusion, both RIDE ON EXPRESS HOLDINGS' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think RIDE ON EXPRESS HOLDINGS' underlying earnings potential is as good as, or probably even better, than the statutory profit makes it seem! So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - RIDE ON EXPRESS HOLDINGS has 2 warning signs we think you should be aware of.

After our examination into the nature of RIDE ON EXPRESS HOLDINGS' profit, we've come away optimistic for the company. 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. 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.