Investors were underwhelmed by the solid earnings posted by Hyfusin Group Holdings Limited (HKG:8512) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.
A Closer Look At Hyfusin Group Holdings' Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Hyfusin Group Holdings has an accrual ratio of -0.15 for the year to June 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of HK$190m during the period, dwarfing its reported profit of HK$137.3m. Hyfusin Group Holdings' 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 Hyfusin Group Holdings.
Our Take On Hyfusin Group Holdings' Profit Performance
Hyfusin Group Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Hyfusin Group Holdings' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 9.4% annually, over the last three years. 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 want to do dive deeper into Hyfusin Group Holdings, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Hyfusin Group Holdings you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of Hyfusin Group Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.
