Soft earnings didn’t appear to concern System Location Co.,Ltd.’s (TSE:2480) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.
We’ve found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.
A Closer Look At System LocationLtd’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. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
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. 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.
System LocationLtd has an accrual ratio of -0.21 for the year to March 2026. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of JP¥625m during the period, dwarfing its reported profit of JP¥297.0m. System LocationLtd 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.
Check out our latest analysis for System LocationLtd
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of System LocationLtd.
The Impact Of Unusual Items On Profit
System LocationLtd’s profit was reduced by unusual items worth JP¥118m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we’d expect to see a strong accrual ratio, which is exactly what has happened in this case. 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. If System LocationLtd doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.
Our Take On System LocationLtd’s Profit Performance
In conclusion, both System LocationLtd’s accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. After considering all this, we reckon System LocationLtd’s statutory profit probably understates its earnings potential! If you’d like to know more about System LocationLtd as a business, it’s important to be aware of any risks it’s facing. For example, System LocationLtd has 2 warning signs(and 1 which doesn’t sit too well with us) we think you should know about.
Our examination of System LocationLtd 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 freecollection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.
New:Manage All Your Stock Portfolios in One Place
We’ve created the ultimate portfolio companion for stock investors, and it’s free.
• Connect an unlimited number of Portfolios and see your total in one currency• Be alerted to new Warning Signs or Risks via email or mobile• Track the Fair Value of your stocks
Try a Demo Portfolio for Free
Have feedback on this article? Concerned about the content?Get in touchwith us directly.Alternatively, email editorial-team (at) simplywallst.com.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.
About TSE:2480
System LocationLtd
Provides business support for finance companies in Japan and internationally.
See The Free Research Report
Flawless balance sheet established dividend payer.
See The Free Research Report
Market Insights
Q-Day: The risk the market forgot to reprice
Richard Bowman
Finding dividends that actually last
Mitchell Lawler
Watt’s left in the overcrowded power trade?Richard Bowman
Weekly Picks
Ceazaron Sparc AI2 months ago
When GPS fails: this small cap is fixing a $54B drone problem
Fair Value:CA$5.2542.1% undervalued
74users have followed this narrative
0users have commented on this narrative
18users have liked this narrative
HedgeYon IonQabout 2 months ago
The Best-Funded Quantum Platform and Still a Stock Priced for Perfection
Fair Value:US$48
30users have followed this narrative
0users have commented on this narrative
8users have liked this narrative
BlackGoaton Cerebras Systems11 days ago
The Wafer Giant Threatening NVIDIA’s GPU Hegemony
Fair Value:US$415.5450.7% undervalued
52users have followed this narrative
1users have commented on this narrative
7users have liked this narrative
Ivoedon Netflix7 days ago
Netflix’s Business Quality Is Clear. The Harder Question Is Whether The Stock Is Still Cheap
Fair Value:US$825.3% undervalued
27users have followed this narrative
2users have commented on this narrative
8users have liked this narrative
Updated Narratives
DrPotatoon TeamViewer33 minutes ago
TeamViewer Set to Evolve from Stagnation to Enterprise Growth by 2028
Fair Value:€13.3260.9% undervalued
1users have followed this narrative
0users have commented on this narrative
0users have liked this narrative
John_Ericon Veeva Systemsabout 3 hours ago
AI-Powered Veeva Systems Poised for Solid Growth Amid Regulatory Stability
Fair Value:US$32039.8% undervalued
1users have followed this narrative
0users have commented on this narrative
0users have liked this narrative
European_Hidden_Gem_Stockson Creotech Instrumentsabout 8 hours ago
$CRI Creotech Instruments (WSE:CRI): Two Minute Drill
Fair Value:zł822.191.8% undervalued
1users have followed this narrative
0users have commented on this narrative
0users have liked this narrative
