There May Be Some Bright Spots In CAVE InteractiveLTD's (TSE:3760) Earnings

The most recent earnings report from CAVE Interactive CO.,LTD. (TSE:3760) was disappointing for shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

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A Closer Look At CAVE InteractiveLTD's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

CAVE InteractiveLTD has an accrual ratio of 0.37 for the year to May 2025. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥258m despite its profit of JP¥246.0m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥258m, this year, indicates high risk. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Check out our latest analysis for CAVE InteractiveLTD

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of CAVE InteractiveLTD.

The Impact Of Unusual Items On Profit

CAVE InteractiveLTD's profit suffered from unusual items, which reduced profit by JP¥1.5b in the last twelve months. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. CAVE InteractiveLTD took a rather significant hit from unusual items in the year to May 2025. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On CAVE InteractiveLTD's Profit Performance

In conclusion, CAVE InteractiveLTD's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, it's hard to tell if CAVE InteractiveLTD's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into CAVE InteractiveLTD, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 4 warning signs for CAVE InteractiveLTD (of which 1 is a bit concerning!) you should know about.

Our examination of CAVE InteractiveLTD has focussed on certain factors that can make its earnings look better than they are. 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.