Leopalace21's (TSE:8848) Soft Earnings Are Actually Better Than They Appear

The most recent earnings report from Leopalace21 Corporation (TSE:8848) was disappointing for shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

Our free stock report includes 2 warning signs investors should be aware of before investing in Leopalace21. Read for free now.

Zooming In On Leopalace21'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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 March 2025, Leopalace21 recorded an accrual ratio of -0.24. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of JP¥25b in the last year, which was a lot more than its statutory profit of JP¥17.9b. Leopalace21's free cash flow improved over the last year, which is generally good to see.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Leopalace21's Profit Performance

Happily for shareholders, Leopalace21 produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Leopalace21's statutory profit actually understates its earnings potential! And the EPS is up 56% annually, 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Leopalace21 has 2 warning signs and it would be unwise to ignore these.

This note has only looked at a single factor that sheds light on the nature of Leopalace21's profit. 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.