Funai Soken Holdings’ (TSE:9757) Soft Earnings Are Actually Better Than They Appear

The market for Funai Soken Holdings Incorporated’s (TSE:9757) shares didn’t move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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A Closer Look At Funai Soken Holdings’ Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. This ratio tells us how much of a company’s profit is not backed by free cashflow.

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.

Over the twelve months to June 2025, Funai Soken Holdings recorded an accrual ratio of -0.23. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of JP¥7.4b in the last year, which was a lot more than its statutory profit of JP¥4.70b. Funai Soken Holdings’ free cash flow improved over the last year, which is generally good to see. However, that’s not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Funai Soken Holdings

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.

How Do Unusual Items Influence Profit?

Funai Soken Holdings’ profit was reduced by unusual items worth JP¥2.2b in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you’d expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual expenses don’t come up again, we’d therefore expect Funai Soken Holdings to produce a higher profit next year, all else being equal.

Our Take On Funai Soken Holdings’ Profit Performance

Considering both Funai Soken Holdings’ accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company’s underlying earnings power. After considering all this, we reckon Funai Soken Holdings’ statutory profit probably understates its earnings potential! So while earnings quality is important, it’s equally important to consider the risks facing Funai Soken Holdings at this point in time. In terms of investment risks, we’ve identified 2 warning signs with Funai Soken Holdings, and understanding them should be part of your investment process.

Our examination of Funai Soken Holdings has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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. 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.