CAICA DIGITAL's (TSE:2315) Earnings Might Not Be As Promising As They Seem

Shareholders didn't seem to be thrilled with CAICA DIGITAL Inc.'s (TSE:2315) recent earnings report, despite healthy profit numbers. Our analysis has found some concerning factors which weaken the profit's foundation.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Examining Cashflow Against CAICA DIGITAL's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 April 2025, CAICA DIGITAL recorded an accrual ratio of 0.38. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of JP¥27m during the period, falling well short of its reported profit of JP¥616.0m. Given that CAICA DIGITAL had negative free cash flow in the prior corresponding period, the trailing twelve month resul of JP¥27m would seem to be a step in the right direction. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

View our latest analysis for CAICA DIGITAL

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by JP¥526m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. CAICA DIGITAL had a rather significant contribution from unusual items relative to its profit to April 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On CAICA DIGITAL's Profit Performance

CAICA DIGITAL had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue CAICA DIGITAL's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about CAICA DIGITAL as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 3 warning signs (2 are a bit unpleasant!) that you ought to be aware of before buying any shares in CAICA DIGITAL.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.