The market seemed underwhelmed by last week's earnings announcement from Xinhua Winshare Publishing and Media Co., Ltd. (HKG:811) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.
Examining Cashflow Against Xinhua Winshare Publishing and Media'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. 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. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 December 2023, Xinhua Winshare Publishing and Media had an accrual ratio of -0.14. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of CN¥2.2b during the period, dwarfing its reported profit of CN¥1.58b. Xinhua Winshare Publishing and Media's free cash flow improved over the last year, which is generally good to see.
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.
Our Take On Xinhua Winshare Publishing and Media's Profit Performance
Xinhua Winshare Publishing and Media's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Xinhua Winshare Publishing and Media's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 25% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 2 warning signs for Xinhua Winshare Publishing and Media (1 can't be ignored) you should be familiar with.
Today we've zoomed in on a single data point to better understand the nature of Xinhua Winshare Publishing and Media's 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. 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.