Glorious Sun Enterprises Limited's (HKG:393) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.
Zooming In On Glorious Sun Enterprises' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.
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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to December 2024, Glorious Sun Enterprises had an accrual ratio of -0.21. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of HK$274m during the period, dwarfing its reported profit of HK$61.4m. Glorious Sun Enterprises shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.
View our latest analysis for Glorious Sun Enterprises
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Glorious Sun Enterprises.
The Impact Of Unusual Items On Profit
On top of the noteworthy accrual ratio and the spike in non-operating revenue, we can also see that Glorious Sun Enterprises suffered from unusual items, which reduced profit by HK$192m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. In the twelve months to December 2024, Glorious Sun Enterprises had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.
Our Take On Glorious Sun Enterprises' Profit Performance
In conclusion, both Glorious Sun Enterprises' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Glorious Sun Enterprises' underlying earnings potential is as good as, or probably even better, than the statutory profit makes it seem! So while earnings quality is important, it's equally important to consider the risks facing Glorious Sun Enterprises at this point in time. For example, we've found that Glorious Sun Enterprises has 3 warning signs (1 is potentially serious!) that deserve your attention before going any further with your analysis.
Our examination of Glorious Sun Enterprises has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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. 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.