The market seemed underwhelmed by last week's earnings announcement from Yan Tat Group Holdings Limited (HKG:1480) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.
See our latest analysis for Yan Tat Group Holdings
Zooming In On Yan Tat Group Holdings' Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.
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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to June 2023, Yan Tat Group Holdings had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of HK$131m in the last year, which was a lot more than its statutory profit of HK$91.8m. Yan Tat Group Holdings' free cash flow improved over the last year, which is generally good to see.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Yan Tat Group Holdings.
Our Take On Yan Tat Group Holdings' Profit Performance
Yan Tat Group Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Yan Tat Group Holdings' earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Yan Tat Group Holdings has 2 warning signs we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Yan Tat Group Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.