When companies post strong earnings, the stock generally performs well, just like Fujikon Industrial Holdings Limited's (HKG:927) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.
Check out our latest analysis for Fujikon Industrial Holdings
Examining Cashflow Against Fujikon Industrial 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. The ratio shows us how much a company's profit exceeds its FCF.
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. 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 September 2023, Fujikon Industrial Holdings recorded an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of HK$101m during the period, dwarfing its reported profit of HK$47.0m. Given that Fujikon Industrial Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$101m would seem to be a step in the right direction.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fujikon Industrial Holdings.
Our Take On Fujikon Industrial Holdings' Profit Performance
Happily for shareholders, Fujikon Industrial Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Fujikon Industrial Holdings' statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Fujikon Industrial Holdings, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for Fujikon Industrial Holdings (1 is concerning!) and we strongly recommend you look at these before investing.
This note has only looked at a single factor that sheds light on the nature of Fujikon Industrial 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.