YUKE'SLtd's (TSE:4334) Earnings Seem To Be Promising

YUKE'S Co.,Ltd. (TSE:4334) just released a solid earnings report, and the stock displayed some strength. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

See our latest analysis for YUKE'SLtd

Zooming In On YUKE'SLtd'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). 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

YUKE'SLtd has an accrual ratio of -0.53 for the year to January 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥772m during the period, dwarfing its reported profit of JP¥198.0m. Given that YUKE'SLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥772m would seem to be a step in the right direction. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of YUKE'SLtd.

How Do Unusual Items Influence Profit?

Surprisingly, given YUKE'SLtd's accrual ratio implied strong cash conversion, its paper profit was actually boosted by JP¥133m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. YUKE'SLtd had a rather significant contribution from unusual items relative to its profit to January 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On YUKE'SLtd's Profit Performance

In conclusion, YUKE'SLtd's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if YUKE'SLtd's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into YUKE'SLtd, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for YUKE'SLtd you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.