The market for Excellence Commercial Property & Facilities Management Group Limited's (HKG:6989) stock was strong after it released a healthy earnings report last week. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

A Closer Look At Excellence Commercial Property & Facilities Management Group's 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to June 2024, Excellence Commercial Property & Facilities Management Group had an accrual ratio of 0.57. 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¥302.8m, a look at free cash flow indicates it actually burnt through CN¥693m in the last year. We also note that Excellence Commercial Property & Facilities Management Group's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥693m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Excellence Commercial Property & Facilities Management Group.

Our Take On Excellence Commercial Property & Facilities Management Group's Profit Performance

As we have made quite clear, we're a bit worried that Excellence Commercial Property & Facilities Management Group didn't back up the last year's profit with free cashflow. For this reason, we think that Excellence Commercial Property & Facilities Management Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 15% EPS growth in the last year. 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. If you'd like to know more about Excellence Commercial Property & Facilities Management Group as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Excellence Commercial Property & Facilities Management Group (of which 2 are a bit unpleasant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Excellence Commercial Property & Facilities Management 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 with significant insider holdings to be useful.

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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.