We Like i Cubed Systems' (TSE:4495) Earnings For More Than Just Statutory Profit

The market seemed underwhelmed by last week's earnings announcement from i Cubed Systems, Inc. (TSE:4495) despite the healthy numbers. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

See our latest analysis for i Cubed Systems

A Closer Look At i Cubed Systems' 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

i Cubed Systems has an accrual ratio of -0.13 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of JP¥529m during the period, dwarfing its reported profit of JP¥463.5m. Notably, i Cubed Systems had negative free cash flow last year, so the JP¥529m it produced this year was a welcome improvement.

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 i Cubed Systems' Profit Performance

As we discussed above, i Cubed Systems has perfectly satisfactory free cash flow relative to profit. Because of this, we think i Cubed Systems' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 9.7% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about i Cubed Systems as a business, it's important to be aware of any risks it's facing. For example - i Cubed Systems has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of i Cubed Systems' 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.