Investors signalled that they were pleased with Greentown Service Group Co. Ltd.'s (HKG:2869) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

Examining Cashflow Against Greentown Service Group'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.

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. 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.

For the year to December 2023, Greentown Service Group had an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of CN¥933m during the period, dwarfing its reported profit of CN¥605.4m. Greentown Service Group's free cash flow improved over the last year, which is generally good to see.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Greentown Service Group's Profit Performance

As we discussed above, Greentown Service Group has perfectly satisfactory free cash flow relative to profit. Because of this, we think Greentown Service Group's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 12% 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. If you'd like to know more about Greentown Service Group as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Greentown Service Group and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of Greentown Service Group'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 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.