We're Not So Sure You Should Rely on Raysum's (TYO:8890) Statutory Earnings

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Raysum (TYO:8890).

It's good to see that over the last twelve months Raysum made a profit of JP¥6.01b on revenue of JP¥44.0b. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for Raysum

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Today, we'll discuss Raysum's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Raysum.

Zooming In On Raysum'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.

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 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.

Over the twelve months to September 2020, Raysum recorded an accrual ratio of 0.46. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of JP¥22b, in contrast to the aforementioned profit of JP¥6.01b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥22b, this year, indicates high risk.

Our Take On Raysum's Profit Performance

As we discussed above, we think Raysum's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Raysum's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 7.4% in the last year. 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. If you want to do dive deeper into Raysum, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Raysum (including 2 which are a bit concerning).

Today we've zoomed in on a single data point to better understand the nature of Raysum'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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