There May Be Reason For Hope In Space Shower Skiyaki Holdings' (TSE:4838) Disappointing Earnings

The market for Space Shower Skiyaki Holdings Inc.'s (TSE:4838) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Space Shower Skiyaki Holdings

A Closer Look At Space Shower Skiyaki Holdings' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Space Shower Skiyaki Holdings has an accrual ratio of -0.55 for the year to March 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of JP¥783m in the last year, which was a lot more than its statutory profit of JP¥280.0m. Space Shower Skiyaki Holdings' free cash flow improved over the last year, which is generally good to see. Having said that, there is more to consider. We must also consider the impact of unusual items on statutory profit (and thus the accrual ratio), as well as note the ramifications of the company issuing new shares.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Space Shower Skiyaki Holdings.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Space Shower Skiyaki Holdings expanded the number of shares on issue by 99% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Space Shower Skiyaki Holdings' historical EPS growth by clicking on this link.

How Is Dilution Impacting Space Shower Skiyaki Holdings' Earnings Per Share (EPS)?

Space Shower Skiyaki Holdings was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 20%. Sadly, earnings per share fell further, down a full 20% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if Space Shower Skiyaki Holdings' earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Space Shower Skiyaki Holdings' profit was reduced by unusual items worth JP¥165m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Space Shower Skiyaki Holdings doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Space Shower Skiyaki Holdings' Profit Performance

Summing up, Space Shower Skiyaki Holdings' accrual ratio and its unusual items suggest that its statutory earnings were temporarily depressed (and could bounce back), while the dilution is a negative for shareholders. Looking at all these factors, we'd say that Space Shower Skiyaki Holdings' underlying earnings power is at least as good as the statutory numbers would make it seem. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 4 warning signs for Space Shower Skiyaki Holdings (1 is a bit unpleasant) you should be familiar with.

Our examination of Space Shower Skiyaki Holdings has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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.