Why Bank of InnovationInc's (TSE:4393) Earnings Are Better Than They Seem

The stock was sluggish on the back of Bank of Innovation,Inc.'s (TSE:4393) recent earnings report. Along with the solid headline numbers, we think that investors have some reasons for optimism.

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Zooming In On Bank of InnovationInc'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Bank of InnovationInc has an accrual ratio of -1.34 for the year to September 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of JP¥2.8b during the period, dwarfing its reported profit of JP¥1.35b. Given that Bank of InnovationInc had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥2.8b would seem to be a step in the right direction.

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

Our Take On Bank of InnovationInc's Profit Performance

Happily for shareholders, Bank of InnovationInc produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Bank of InnovationInc'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 increased by 51% in the last year. 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. If you'd like to know more about Bank of InnovationInc as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Bank of InnovationInc you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Bank of InnovationInc'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.