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Statutory Earnings May Not Be The Best Way To Understand Kikuchi Seisakusho's (TSE:3444) True Position

Simply Wall St · 3d ago

Strong earnings weren't enough to please Kikuchi Seisakusho Co., Ltd.'s (TSE:3444) shareholders over the last week. We did some analysis and believe that they might be concerned about some weak underlying factors.

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earnings-and-revenue-history
TSE:3444 Earnings and Revenue History December 22nd 2025

Zooming In On Kikuchi Seisakusho'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.

Over the twelve months to October 2025, Kikuchi Seisakusho recorded an accrual ratio of 0.26. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of JP¥547m despite its profit of JP¥530.0m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of JP¥547m, this year, indicates high risk. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part. One positive for Kikuchi Seisakusho shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

View our latest analysis for Kikuchi Seisakusho

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by JP¥604m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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'. We can see that Kikuchi Seisakusho's positive unusual items were quite significant relative to its profit in the year to October 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Kikuchi Seisakusho's Profit Performance

Summing up, Kikuchi Seisakusho received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Kikuchi Seisakusho's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Kikuchi Seisakusho at this point in time. For example, Kikuchi Seisakusho has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.