Hangzhou Haoyue Personal Care's (SHSE:605009) Problems Go Beyond Weak Profit

The market rallied behind Hangzhou Haoyue Personal Care Co., Ltd's (SHSE:605009) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Hangzhou Haoyue Personal Care.

View our latest analysis for Hangzhou Haoyue Personal Care

A Closer Look At Hangzhou Haoyue Personal Care's 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Hangzhou Haoyue Personal Care recorded an accrual ratio of 0.34. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of CN¥125m, in contrast to the aforementioned profit of CN¥422.9m. It's worth noting that Hangzhou Haoyue Personal Care generated positive FCF of CN¥388m a year ago, so at least they've done it in the past.

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.

Our Take On Hangzhou Haoyue Personal Care's Profit Performance

As we have made quite clear, we're a bit worried that Hangzhou Haoyue Personal Care didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Hangzhou Haoyue Personal Care's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 38% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To help with this, we've discovered 2 warning signs (1 doesn't sit too well with us!) that you ought to be aware of before buying any shares in Hangzhou Haoyue Personal Care.

This note has only looked at a single factor that sheds light on the nature of Hangzhou Haoyue Personal Care'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.