Stock Analysis

Investors Can Find Comfort In Hangzhou Binjiang Real Estate GroupLtd's (SZSE:002244) Earnings Quality

SZSE:002244
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Hangzhou Binjiang Real Estate Group Co.,Ltd's (SZSE:002244) recent soft profit numbers didn't appear to worry shareholders, as the stock price showed strength. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

View our latest analysis for Hangzhou Binjiang Real Estate GroupLtd

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SZSE:002244 Earnings and Revenue History May 3rd 2024

Zooming In On Hangzhou Binjiang Real Estate GroupLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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, Hangzhou Binjiang Real Estate GroupLtd had an accrual ratio of -0.20. 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 CN¥22b during the period, dwarfing its reported profit of CN¥2.40b. Hangzhou Binjiang Real Estate GroupLtd did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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 Binjiang Real Estate GroupLtd's Profit Performance

Happily for shareholders, Hangzhou Binjiang Real Estate GroupLtd produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Hangzhou Binjiang Real Estate GroupLtd's statutory profit actually understates its earnings potential! And the EPS is up 9.0% 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for Hangzhou Binjiang Real Estate GroupLtd you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Hangzhou Binjiang Real Estate GroupLtd's profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Valuation is complex, but we're helping make it simple.

Find out whether Hangzhou Binjiang Real Estate GroupLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.