The Strong Earnings Posted By SAKURASAKU PLUSCo.Ltd (TSE:7097) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that SAKURASAKU PLUS,Co.,Ltd.'s (TSE:7097) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for SAKURASAKU PLUSCo.Ltd

Zooming In On SAKURASAKU PLUSCo.Ltd'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

SAKURASAKU PLUSCo.Ltd has an accrual ratio of -0.16 for the year to July 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of JP¥2.1b, well over the JP¥607.0m it reported in profit. Given that SAKURASAKU PLUSCo.Ltd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥2.1b would seem to be a step in the right direction. However, we can see that a recent tax benefit, along with unusual items, have impacted its statutory profit, and therefore its accrual ratio.

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

How Do Unusual Items Influence Profit?

SAKURASAKU PLUSCo.Ltd's profit was reduced by unusual items worth JP¥396m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. SAKURASAKU PLUSCo.Ltd took a rather significant hit from unusual items in the year to July 2024. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

An Unusual Tax Situation

In addition to the notable accrual ratio, we can see that SAKURASAKU PLUSCo.Ltd received a tax benefit of JP¥131m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On SAKURASAKU PLUSCo.Ltd's Profit Performance

Summing up, SAKURASAKU PLUSCo.Ltd's accrual ratio and its unusual items suggest that its statutory earnings were temporarily depressed, while its tax benefit is having the opposite effect. Based on these factors, we think SAKURASAKU PLUSCo.Ltd's earnings potential is at least as good as it seems, and maybe even better! In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, SAKURASAKU PLUSCo.Ltd has 5 warning signs (and 1 which can't be ignored) we think you should know about.

Our examination of SAKURASAKU PLUSCo.Ltd has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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 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.