The subdued stock price reaction suggests that PC Partner Group Limited's (HKG:1263) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.
Examining Cashflow Against PC Partner Group'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
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.
For the year to December 2024, PC Partner Group had an accrual ratio of -1.18. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of HK$1.8b in the last year, which was a lot more than its statutory profit of HK$262.1m. PC Partner 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 PC Partner Group .
Our Take On PC Partner Group's Profit Performance
Happily for shareholders, PC Partner Group produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think PC Partner Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Furthermore, it has done a great job growing EPS over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into PC Partner Group, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with PC Partner Group (including 1 which can't be ignored) .
This note has only looked at a single factor that sheds light on the nature of PC Partner Group's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.