The most recent earnings report from Bamboos Health Care Holdings Limited (HKG:2293) was disappointing for shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.
Examining Cashflow Against Bamboos Health Care Holdings' 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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. 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 December 2024, Bamboos Health Care Holdings recorded an accrual ratio of -0.15. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of HK$54m, well over the HK$23.9m it reported in profit. Bamboos Health Care Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Bamboos Health Care Holdings.
Our Take On Bamboos Health Care Holdings' Profit Performance
Bamboos Health Care Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Bamboos Health Care Holdings' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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 want to do dive deeper into Bamboos Health Care Holdings, you'd also look into what risks it is currently facing. Be aware that Bamboos Health Care Holdings is showing 3 warning signs in our investment analysis and 1 of those can't be ignored...
Today we've zoomed in on a single data point to better understand the nature of Bamboos Health Care Holdings' 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.
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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.