WEBULL

Generation PassLtd's (TSE:3195) Solid Profits Have Weak Fundamentals

Simply Wall St · 2d ago

Investors were disappointed with Generation Pass Co.,Ltd.'s (TSE:3195) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

earnings-and-revenue-history
TSE:3195 Earnings and Revenue History December 22nd 2025

Examining Cashflow Against Generation PassLtd'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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to October 2025, Generation PassLtd had an accrual ratio of 0.48. 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. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥740m despite its profit of JP¥161.0m, mentioned above. It's worth noting that Generation PassLtd generated positive FCF of JP¥184m a year ago, so at least they've done it in the past. The good news for shareholders is that Generation PassLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On Generation PassLtd's Profit Performance

As we discussed above, we think Generation PassLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Generation PassLtd's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Generation PassLtd as a business, it's important to be aware of any risks it's facing. Be aware that Generation PassLtd is showing 4 warning signs in our investment analysis and 3 of those are significant...

Today we've zoomed in on a single data point to better understand the nature of Generation PassLtd'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. 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.