Why Hoshine Silicon Industry's (SHSE:603260) Shaky Earnings Are Just The Beginning Of Its Problems

Hoshine Silicon Industry Co., Ltd.'s (SHSE:603260) stock showed strength, with investors undeterred by its weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

Check out our latest analysis for Hoshine Silicon Industry

Examining Cashflow Against Hoshine Silicon Industry's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2024, Hoshine Silicon Industry recorded an accrual ratio of 0.25. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥12b, in contrast to the aforementioned profit of CN¥1.82b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥12b, this year, indicates high risk. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Hoshine Silicon Industry's profit was boosted by unusual items worth CN¥429m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Hoshine Silicon Industry 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 Hoshine Silicon Industry's Profit Performance

Summing up, Hoshine Silicon Industry received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Hoshine Silicon Industry's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Hoshine Silicon Industry, you'd also look into what risks it is currently facing. Our analysis shows 4 warning signs for Hoshine Silicon Industry (2 are potentially serious!) and we strongly recommend you look at these before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.