We Think NIFTY Lifestyle's (TSE:4262) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by the solid earnings posted by NIFTY Lifestyle Co., Ltd. (TSE:4262) recently. Along with the solid headline numbers, we think that investors have some reasons for optimism.

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Zooming In On NIFTY Lifestyle'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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, NIFTY Lifestyle had an accrual ratio of -0.14. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of JP¥949m during the period, dwarfing its reported profit of JP¥719.0m. NIFTY Lifestyle 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 NIFTY Lifestyle.

Our Take On NIFTY Lifestyle's Profit Performance

NIFTY Lifestyle's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that NIFTY Lifestyle's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 34% per year over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about NIFTY Lifestyle as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for NIFTY Lifestyle and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of NIFTY Lifestyle'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.