We Think You Should Be Aware Of Some Concerning Factors In Koukandekirukun's (TSE:7695) Earnings

The recent earnings posted by Koukandekirukun, Inc. (TSE:7695) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Koukandekirukun

Zooming In On Koukandekirukun'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2024, Koukandekirukun recorded an accrual ratio of 0.51. As a general rule, that bodes poorly for future profitability. 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¥34m, in contrast to the aforementioned profit of JP¥230.0m. It's worth noting that Koukandekirukun generated positive FCF of JP¥250m a year ago, so at least they've done it in the past. One positive for Koukandekirukun shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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 Koukandekirukun's Profit Performance

As we have made quite clear, we're a bit worried that Koukandekirukun didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Koukandekirukun's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 24% EPS growth 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. So while earnings quality is important, it's equally important to consider the risks facing Koukandekirukun at this point in time. For instance, we've identified 2 warning signs for Koukandekirukun (1 is concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Koukandekirukun'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 with high insider ownership.

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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.