The subdued stock price reaction suggests that Top Education Group Ltd's (HKG:1752) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.
Zooming In On Top Education 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. 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to December 2024, Top Education Group recorded an accrual ratio of -1.58. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of AU$7.0m during the period, dwarfing its reported profit of AU$2.47m. Top Education Group did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Top Education Group.
Our Take On Top Education Group's Profit Performance
Happily for shareholders, Top Education Group produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Top Education Group's statutory profit actually understates its earnings potential! And the EPS is up 6.7% over 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 2 warning signs for Top Education Group (of which 1 is significant!) you should know about.
Today we've zoomed in on a single data point to better understand the nature of Top Education Group'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.