The market for China Chengtong Development Group Limited's (HKG:217) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.
View our latest analysis for China Chengtong Development Group
A Closer Look At China Chengtong Development Group's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.
China Chengtong Development Group has an accrual ratio of -0.28 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of HK$2.4b, well over the HK$56.0m it reported in profit. Given that China Chengtong Development Group had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$2.4b would seem to be a step in the right direction.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Chengtong Development Group.
Our Take On China Chengtong Development Group's Profit Performance
As we discussed above, China Chengtong Development Group's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that China Chengtong Development Group's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, China Chengtong Development Group has 5 warning signs (and 1 which is a bit concerning) we think you should know about.
This note has only looked at a single factor that sheds light on the nature of China Chengtong Development Group's profit. 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. 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.
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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.