The market seemed underwhelmed by the solid earnings posted by Zhengwei Group Holdings Company Limited (HKG:2147) recently. Along with the solid headline numbers, we think that investors have some reasons for optimism.
Check out our latest analysis for Zhengwei Group Holdings
Examining Cashflow Against Zhengwei Group Holdings' Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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".
Zhengwei Group Holdings has an accrual ratio of -0.10 for the year to June 2023. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of CN¥70m in the last year, which was a lot more than its statutory profit of CN¥55.5m. Zhengwei Group Holdings did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhengwei Group Holdings.
Our Take On Zhengwei Group Holdings' Profit Performance
Zhengwei Group Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Zhengwei Group Holdings' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 1 warning sign for Zhengwei Group Holdings you should know about.
Today we've zoomed in on a single data point to better understand the nature of Zhengwei Group Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.
したがって、会社が負の財務勘定比率を持つことは実際には良いことと考えられていますが、財務勘定比率がプラスの場合は悪いことです。財務勘定比率がゼロ以上であること自体はあまり心配する必要はありませんが、それが相対的に高い場合は注意が必要だと考えています。Lewellen and Resutekの2014年の論文に引用すると、「高い勘定引当金を持つ企業は将来的には利益が低い傾向がある」とのことです。
Zhengwei Group Holdingsは、2023年6月に-0.10の受け取り比率を持っています。これは、良好な現金化を意味し、昨年のフリーキャッシュフローが利益を大幅に上回ったことを意味しています。実際のところ、昨年はCN¥70mのフリーキャッシュフローを記録し、法定利益のCN¥55.5mよりもかなり多かったです。Zhengwei Group Holdingsは、フリーキャッシュフローが前年比で低下したことを見ています。これは理想的ではなく、Groundskeeper WillieがいないSimpson'sのエピソードのようです。
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オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。