The subdued stock price reaction suggests that Pan Hong Holdings Group Limited's (SGX:P36) strong earnings didn't offer any surprises.  Our analysis suggests that investors might be missing some promising details.    

SGX:P36 Earnings and Revenue History June 4th 2024

A Closer Look At Pan Hong Holdings 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).  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.  You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.  Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Pan Hong Holdings Group has an accrual ratio of -0.15 for the year to March 2024.   That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow.    Indeed, in the last twelve months it reported free cash flow of CN¥194m, well over the CN¥31.1m it reported in profit.    Pan Hong Holdings Group's free cash flow improved over the last year, which is generally good to see.  

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pan Hong Holdings Group.

Our Take On Pan Hong Holdings Group's Profit Performance

Pan Hong Holdings Group's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above.      Because of this, we think Pan Hong Holdings Group's earnings potential is at least as good as it seems, and maybe even better!     And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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.    So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing.    Be aware that Pan Hong Holdings Group is showing 3 warning signs in our investment analysis and 1 of those is a bit unpleasant...  

This note has only looked at a single factor that sheds light on the nature of Pan Hong Holdings Group's profit.   But there are plenty of other ways to inform your opinion of a company.  Some people consider a high return on equity to be a good sign of a quality business.  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.