The market shrugged off CIFI Ever Sunshine Services Group Limited's (HKG:1995) weak earnings report. Despite the market responding positively, we think that there are several concerning factors that investors should be aware of.
Check out our latest analysis for CIFI Ever Sunshine Services Group
Examining Cashflow Against CIFI Ever Sunshine Services Group's 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to June 2023, CIFI Ever Sunshine Services Group recorded an accrual ratio of 1.14. 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. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.1b despite its profit of CN¥343.2m, mentioned above. It's worth noting that CIFI Ever Sunshine Services Group generated positive FCF of CN¥511m a year ago, so at least they've done it in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
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.
The Impact Of Unusual Items On Profit
Given the accrual ratio, it's not overly surprising that CIFI Ever Sunshine Services Group's profit was boosted by unusual items worth CN¥60m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On CIFI Ever Sunshine Services Group's Profit Performance
Summing up, CIFI Ever Sunshine Services Group received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue CIFI Ever Sunshine Services Group's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into CIFI Ever Sunshine Services Group, you'd also look into what risks it is currently facing. When we did our research, we found 4 warning signs for CIFI Ever Sunshine Services Group (2 make us uncomfortable!) that we believe deserve your full attention.
In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.