The market for Onewo Inc.'s (HKG:2602) 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.
We've discovered 2 warning signs about Onewo. View them for free.
Examining Cashflow Against Onewo'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. 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. 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. 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, Onewo had an accrual ratio of -0.20. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of CN¥1.7b during the period, dwarfing its reported profit of CN¥1.15b. Onewo's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
Our data indicates that Onewo insiders have been buying shares! Luckily we are in a position to provide you with this free chart of of all insider buying (and selling).
Our Take On Onewo's Profit Performance
As we discussed above, Onewo's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Onewo's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Onewo has 2 warning signs we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Onewo'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.