Soft earnings didn't appear to concern Pacific Millennium Packaging Group Corporation's (HKG:1820) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

A Closer Look At Pacific Millennium Packaging Group's 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Pacific Millennium Packaging Group has an accrual ratio of -0.13 for the year to December 2023. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CN¥131m during the period, dwarfing its reported profit of CN¥22.4m. Pacific Millennium Packaging Group's 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 Pacific Millennium Packaging Group.

Our Take On Pacific Millennium Packaging Group's Profit Performance

Pacific Millennium Packaging Group's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Pacific Millennium Packaging Group's earnings potential is at least as good as it seems, and maybe even better! 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. If you'd like to know more about Pacific Millennium Packaging Group as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Pacific Millennium Packaging Group, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Pacific Millennium Packaging 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.