There May Be Some Bright Spots In SUNNY SIDE UP GROUP's (TSE:2180) Earnings

Soft earnings didn't appear to concern SUNNY SIDE UP GROUP Inc.'s (TSE:2180) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for SUNNY SIDE UP GROUP

A Closer Look At SUNNY SIDE UP GROUP'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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

SUNNY SIDE UP GROUP has an accrual ratio of -0.18 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of JP¥1.2b in the last year, which was a lot more than its statutory profit of JP¥761.0m. SUNNY SIDE UP GROUP shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SUNNY SIDE UP GROUP.

Our Take On SUNNY SIDE UP GROUP's Profit Performance

As we discussed above, SUNNY SIDE UP GROUP's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think SUNNY SIDE UP GROUP's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 19% per year 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. So while earnings quality is important, it's equally important to consider the risks facing SUNNY SIDE UP GROUP at this point in time. You'd be interested to know, that we found 2 warning signs for SUNNY SIDE UP GROUP and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of SUNNY SIDE UP GROUP's profit. 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. 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.