Hisense Home Appliances Group's (SZSE:000921) Earnings May Just Be The Starting Point

When companies post strong earnings, the stock generally performs well, just like Hisense Home Appliances Group Co., Ltd.'s (SZSE:000921) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

See our latest analysis for Hisense Home Appliances Group

Zooming In On Hisense Home Appliances 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

Hisense Home Appliances Group has an accrual ratio of -2.17 for the year to March 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥8.9b in the last year, which was a lot more than its statutory profit of CN¥3.20b. Hisense Home Appliances Group's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

Surprisingly, given Hisense Home Appliances Group's accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥540m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. If Hisense Home Appliances Group doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Hisense Home Appliances Group's Profit Performance

Hisense Home Appliances Group's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Considering all the aforementioned, we'd venture that Hisense Home Appliances Group's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Hisense Home Appliances Group as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Hisense Home Appliances Group and you'll want to know about it.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.

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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.