There May Be Reason For Hope In SAKURASAKU PLUSCo.Ltd's (TSE:7097) Disappointing Earnings

Shareholders appeared unconcerned with SAKURASAKU PLUS,Co.,Ltd.'s (TSE:7097) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Examining Cashflow Against SAKURASAKU PLUSCo.Ltd's 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. 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'.

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. 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".

SAKURASAKU PLUSCo.Ltd has an accrual ratio of -0.12 for the year to January 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of JP¥1.7b in the last year, which was a lot more than its statutory profit of JP¥511.0m. Notably, SAKURASAKU PLUSCo.Ltd had negative free cash flow last year, so the JP¥1.7b it produced this year was a welcome improvement. However, we can see that a recent tax benefit, along with unusual items, have impacted its statutory profit, and therefore its accrual ratio.

See our latest analysis for SAKURASAKU PLUSCo.Ltd

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

The Impact Of Unusual Items On Profit

SAKURASAKU PLUSCo.Ltd's profit was reduced by unusual items worth JP¥404m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. 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. In the twelve months to January 2025, SAKURASAKU PLUSCo.Ltd had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

An Unusual Tax Situation

In addition to the notable accrual ratio, we can see that SAKURASAKU PLUSCo.Ltd received a tax benefit of JP¥87m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

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. Every company has risks, and we've spotted 5 warning signs for SAKURASAKU PLUSCo.Ltd (of which 1 is a bit unpleasant!) 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 are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.