Last week's earnings announcement from Runhua Living Service Group Holdings Limited (HKG:2455) was disappointing to investors, with a sluggish profit figure. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.
View our latest analysis for Runhua Living Service Group Holdings
Zooming In On Runhua Living Service Group Holdings' Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to December 2022, Runhua Living Service Group Holdings recorded an accrual ratio of 0.36. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥22m, in contrast to the aforementioned profit of CN¥40.2m. It's worth noting that Runhua Living Service Group Holdings generated positive FCF of CN¥25m a year ago, so at least they've done it in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Runhua Living Service Group Holdings.
Our Take On Runhua Living Service Group Holdings' Profit Performance
As we have made quite clear, we're a bit worried that Runhua Living Service Group Holdings didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Runhua Living Service Group Holdings' underlying earnings power is lower 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. If you want to do dive deeper into Runhua Living Service Group Holdings, you'd also look into what risks it is currently facing. For example, Runhua Living Service Group Holdings has 2 warning signs (and 1 which is potentially serious) we think you should know about.
Today we've zoomed in on a single data point to better understand the nature of Runhua Living Service Group Holdings' 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. 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 that insiders are buying 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.