China High Speed Transmission Equipment Group Co., Ltd.'s (HKG:658) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.
Check out our latest analysis for China High Speed Transmission Equipment GroupSEHK:658 Earnings and Revenue History April 21st 2022
Zooming In On China High Speed Transmission Equipment Group's Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 2021, China High Speed Transmission Equipment Group recorded an accrual ratio of 0.40. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥1.32b, a look at free cash flow indicates it actually burnt through CN¥2.6b in the last year. We saw that FCF was CN¥711m a year ago though, so China High Speed Transmission Equipment Group has at least been able to generate positive FCF in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China High Speed Transmission Equipment Group.
Our Take On China High Speed Transmission Equipment Group's Profit Performance
As we have made quite clear, we're a bit worried that China High Speed Transmission Equipment Group didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that China High Speed Transmission Equipment Group's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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'd like to know more about China High Speed Transmission Equipment Group as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for China High Speed Transmission Equipment Group (1 is potentially serious) you should be familiar with.
This note has only looked at a single factor that sheds light on the nature of China High Speed Transmission Equipment Group'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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.