We Think i Cubed Systems' (TSE:4495) Healthy Earnings Might Be Conservative

Investors signalled that they were pleased with i Cubed Systems, Inc.'s (TSE:4495) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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Examining Cashflow Against i Cubed Systems' 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). 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. 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. 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. 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 -0.36 for the year to June 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of JP¥773m during the period, dwarfing its reported profit of JP¥558.6m. i Cubed Systems' free cash flow improved over the last year, which is generally good to see.

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

Our Take On i Cubed Systems' Profit Performance

Happily for shareholders, i Cubed Systems produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that i Cubed Systems' statutory profit actually understates its earnings potential! And the EPS is up 6.9% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing i Cubed Systems at this point in time. While conducting our analysis, we found that i Cubed Systems has 1 warning sign and it would be unwise to ignore it.

Today we've zoomed in on a single data point to better understand 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.