KOIKE-YA's (TSE:2226) Earnings Are Weaker Than They Seem

Despite posting some strong earnings, the market for KOIKE-YA Inc.'s (TSE:2226) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

We've discovered 1 warning sign about KOIKE-YA. View them for free.

Zooming In On KOIKE-YA's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

KOIKE-YA has an accrual ratio of 0.59 for the year to March 2025. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of JP¥2.59b, a look at free cash flow indicates it actually burnt through JP¥7.0b in the last year. We saw that FCF was JP¥3.2b a year ago though, so KOIKE-YA has at least been able to generate positive FCF in the past. The good news for shareholders is that KOIKE-YA's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of KOIKE-YA.

Our Take On KOIKE-YA's Profit Performance

As we have made quite clear, we're a bit worried that KOIKE-YA didn't back up the last year's profit with free cashflow. For this reason, we think that KOIKE-YA's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 1 warning sign with KOIKE-YA, 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 KOIKE-YA's profit. But there are plenty of other ways to inform your opinion of a company. 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.