We Think SUNNY SIDE UP GROUP's (TSE:2180) Profit Is Only A Baseline For What They Can Achieve

When companies post strong earnings, the stock generally performs well, just like SUNNY SIDE UP GROUP Inc.'s (TSE:2180) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

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Examining Cashflow Against SUNNY SIDE UP GROUP'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. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to June 2025, SUNNY SIDE UP GROUP had an accrual ratio of -0.82. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥2.1b in the last year, which was a lot more than its statutory profit of JP¥948.0m. 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

Happily for shareholders, SUNNY SIDE UP GROUP produced plenty of free cash flow to back up its statutory profit numbers. 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 65% 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. 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. In terms of investment risks, we've identified 2 warning signs with SUNNY SIDE UP GROUP, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand 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. 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. 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.