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Tat Hong Equipment Service's (HKG:2153) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Simply Wall St ·  08/03/2022 06:25

The subdued market reaction suggests that Tat Hong Equipment Service Co., Ltd.'s (HKG:2153) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Tat Hong Equipment Service

earnings-and-revenue-historySEHK:2153 Earnings and Revenue History August 2nd 2022

Zooming In On Tat Hong Equipment Service'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'.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2022, Tat Hong Equipment Service recorded an accrual ratio of 0.22. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥355m despite its profit of CN¥47.6m, mentioned above. We also note that Tat Hong Equipment Service's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥355m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tat Hong Equipment Service.

Our Take On Tat Hong Equipment Service's Profit Performance

Tat Hong Equipment Service didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Tat Hong Equipment Service's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 2 warning signs for Tat Hong Equipment Service (1 is potentially serious!) and we strongly recommend you look at these before investing.

Today we've zoomed in on a single data point to better understand the nature of Tat Hong Equipment Service'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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