We Think You Should Be Aware Of Some Concerning Factors In Japan Cash Machine's (TSE:6418) Earnings

The market shrugged off Japan Cash Machine Co., Ltd.'s (TSE:6418) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

See our latest analysis for Japan Cash Machine

Examining Cashflow Against Japan Cash Machine'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. 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.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Japan Cash Machine has an accrual ratio of 0.41 for the year to March 2024. Statistically speaking, that's a real negative for future earnings. 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¥5.8b, in contrast to the aforementioned profit of JP¥3.28b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥5.8b, this year, indicates high risk.

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

Our Take On Japan Cash Machine's Profit Performance

As we have made quite clear, we're a bit worried that Japan Cash Machine didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Japan Cash Machine's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 5.9% in the last year. 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. If you want to do dive deeper into Japan Cash Machine, you'd also look into what risks it is currently facing. For example, we've found that Japan Cash Machine has 2 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Japan Cash Machine'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 with significant insider holdings 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.