Why Miraial's (TSE:4238) Shaky Earnings Are Just The Beginning Of Its Problems

Investors were disappointed by Miraial Co., Ltd.'s (TSE:4238 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

View our latest analysis for Miraial

A Closer Look At Miraial's 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

For the year to January 2024, Miraial had an accrual ratio of 0.43. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of JP¥1.03b, a look at free cash flow indicates it actually burnt through JP¥4.3b in the last year. We also note that Miraial's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of JP¥4.3b.

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

Our Take On Miraial's Profit Performance

As we discussed above, we think Miraial'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 Miraial's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 3 warning signs for Miraial (1 makes us a bit uncomfortable!) and we strongly recommend you look at them before investing.

Today we've zoomed in on a single data point to better understand the nature of Miraial's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying 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.