The stock was sluggish on the back of Pou Sheng International (Holdings) Limited's (HKG:3813) recent earnings report. Our analysis suggests that there are some reasons for hope that investors should be aware of.
See our latest analysis for Pou Sheng International (Holdings)
Examining Cashflow Against Pou Sheng International (Holdings)'s Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. The ratio shows us how much a company's profit exceeds its FCF.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
For the year to June 2024, Pou Sheng International (Holdings) had an accrual ratio of -0.22. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥1.9b, well over the CN¥520.7m it reported in profit. Pou Sheng International (Holdings)'s free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
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.
Our Take On Pou Sheng International (Holdings)'s Profit Performance
As we discussed above, Pou Sheng International (Holdings)'s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Pou Sheng International (Holdings)'s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share increased by 38% in the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Pou Sheng International (Holdings) you should know about.
This note has only looked at a single factor that sheds light on the nature of Pou Sheng International (Holdings)'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. 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.