Weak Statutory Earnings May Not Tell The Whole Story For KOIKE-YA (TSE:2226)

A lackluster earnings announcement from KOIKE-YA Inc. (TSE:2226) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

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Examining Cashflow Against KOIKE-YA's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2025, KOIKE-YA had an accrual ratio of 0.39. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of JP¥4.7b, in contrast to the aforementioned profit of JP¥2.21b. We also note that KOIKE-YA's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥4.7b.

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 the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. 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. You'd be interested to know, that we found 1 warning sign for KOIKE-YA and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of KOIKE-YA's profit. 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.