The subdued stock price reaction suggests that Gangyu Smart Urban Services Holding Limited's (HKG:265) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.
Our free stock report includes 1 warning sign investors should be aware of before investing in Gangyu Smart Urban Services Holding. Read for free now.
A Closer Look At Gangyu Smart Urban Services Holding'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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Gangyu Smart Urban Services Holding has an accrual ratio of -0.25 for the year to December 2024. 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 HK$118m during the period, dwarfing its reported profit of HK$30.1m. Given that Gangyu Smart Urban Services Holding had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$118m would seem to be a step in the right direction.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Gangyu Smart Urban Services Holding.
Our Take On Gangyu Smart Urban Services Holding's Profit Performance
As we discussed above, Gangyu Smart Urban Services Holding's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Gangyu Smart Urban Services Holding's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 41% in the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 1 warning sign for Gangyu Smart Urban Services Holding you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of Gangyu Smart Urban Services Holding's profit. But there are plenty of other ways to inform your opinion of a company. 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.