Guangdong Hoshion Industrial Aluminium's (SZSE:002824) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from Guangdong Hoshion Industrial Aluminium Co., Ltd. (SZSE:002824) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

Check out our latest analysis for Guangdong Hoshion Industrial Aluminium

Zooming In On Guangdong Hoshion Industrial Aluminium'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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 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".

For the year to March 2024, Guangdong Hoshion Industrial Aluminium had an accrual ratio of 0.27. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥134.3m, a look at free cash flow indicates it actually burnt through CN¥432m in the last year. We saw that FCF was CN¥22m a year ago though, so Guangdong Hoshion Industrial Aluminium has at least been able to generate positive FCF 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 Guangdong Hoshion Industrial Aluminium's Profit Performance

Guangdong Hoshion Industrial Aluminium's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Guangdong Hoshion Industrial Aluminium's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the 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. If you'd like to know more about Guangdong Hoshion Industrial Aluminium as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Guangdong Hoshion Industrial Aluminium (including 1 which can't be ignored).

Today we've zoomed in on a single data point to better understand the nature of Guangdong Hoshion Industrial Aluminium's profit. But there are plenty of other ways to inform your opinion of a company. 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.