We Think You Can Look Beyond Ryoden's (TSE:8084) Lackluster Earnings

Explore Ryoden's Fair Values from the Community and select yours

Soft earnings didn't appear to concern Ryoden Corporation's (TSE:8084) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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A Closer Look At Ryoden's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 June 2025, Ryoden had an accrual ratio of -0.24. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of JP¥20b, well over the JP¥4.84b it reported in profit. Ryoden shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Ryoden

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

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Ryoden's profit was boosted by unusual items worth JP¥832m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Ryoden's Profit Performance

Ryoden's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Considering all the aforementioned, we'd venture that Ryoden's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Ryoden as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Ryoden you should know about.

Our examination of Ryoden has focussed on certain factors that can make its earnings look better than they are. 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.