Investors Shouldn't Be Too Comfortable With Loadstar Capital K.K's (TSE:3482) Earnings

Despite announcing strong earnings, Loadstar Capital K.K.'s (TSE:3482) stock was sluggish. We did some digging and found some worrying underlying problems.

See our latest analysis for Loadstar Capital K.K

Zooming In On Loadstar Capital K.K'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2024, Loadstar Capital K.K recorded an accrual ratio of 0.41. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of JP¥19b, in contrast to the aforementioned profit of JP¥6.87b. We also note that Loadstar Capital K.K's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥19b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Loadstar Capital K.K.

Our Take On Loadstar Capital K.K's Profit Performance

As we have made quite clear, we're a bit worried that Loadstar Capital K.K didn't back up the last year's profit with free cashflow. For this reason, we think that Loadstar Capital K.K's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Loadstar Capital K.K at this point in time. When we did our research, we found 3 warning signs for Loadstar Capital K.K (2 are potentially serious!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Loadstar Capital K.K's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.