We Believe SHIKIGAKU’s (TSE:7049) Earnings Are A Poor Guide For Its Profitability

The latest earnings release from SHIKIGAKU. Co., Ltd. (TSE:7049 ) disappointed investors. We did some analysis and believe that they might be concerned about some weak underlying factors.

We’ve discovered 2 warning signs about SHIKIGAKU. View them for free.

Examining Cashflow Against SHIKIGAKU’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. 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. 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. 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.

SHIKIGAKU has an accrual ratio of 0.38 for the year to February 2025. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of JP¥80m during the period, falling well short of its reported profit of JP¥426.6m. Notably, SHIKIGAKU had negative free cash flow last year, so the JP¥80m it produced this year was a welcome improvement. 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 SHIKIGAKU

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

The Impact Of Unusual Items On Profit

Given the accrual ratio, it’s not overly surprising that SHIKIGAKU’s profit was boosted by unusual items worth JP¥213m 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. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. And, after all, that’s exactly what the accounting terminology implies. SHIKIGAKU had a rather significant contribution from unusual items relative to its profit to February 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On SHIKIGAKU’s Profit Performance

SHIKIGAKU had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we’d argue SHIKIGAKU’s profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 2 warning signs for SHIKIGAKU (1 doesn’t sit too well with us!) that we believe deserve your full attention.

Our examination of SHIKIGAKU has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. 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.