The market seemed underwhelmed by last week's earnings announcement from Golik Holdings Limited (HKG:1118) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.
Our free stock report includes 2 warning signs investors should be aware of before investing in Golik Holdings. Read for free now.
A Closer Look At Golik Holdings' Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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.
For the year to December 2024, Golik Holdings had an accrual ratio of -0.96. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$1.6b in the last year, which was a lot more than its statutory profit of HK$158.1m. Golik Holdings' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Golik Holdings.
Our Take On Golik Holdings' Profit Performance
As we discussed above, Golik Holdings' 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 Golik Holdings' statutory profit actually understates its earnings potential! And the EPS is up 14% 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. In terms of investment risks, we've identified 2 warning signs with Golik Holdings, and understanding these bad boys should be part of your investment process.
Today we've zoomed in on a single data point to better understand the nature of Golik Holdings' 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.