We're Not Counting On Prinx Chengshan (Cayman) Holding (HKG:1809) To Sustain Its Statutory Profitability

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Prinx Chengshan (Cayman) Holding's (HKG:1809) statutory profits are a good guide to its underlying earnings.

We like the fact that Prinx Chengshan (Cayman) Holding made a profit of CN¥483.9m on its revenue of CN¥5.56b, in the last year. In the chart below, you can see that its profit and revenue have both grown over the last three years.

View our latest analysis for Prinx Chengshan (Cayman) Holding

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll discuss Prinx Chengshan (Cayman) Holding's free cashflow relative to its earnings, and consider what that tells us about the company. 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.

A Closer Look At Prinx Chengshan (Cayman) Holding'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. 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 June 2020, Prinx Chengshan (Cayman) Holding recorded an accrual ratio of 0.45. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥483.9m, a look at free cash flow indicates it actually burnt through CN¥830m in the last year. We also note that Prinx Chengshan (Cayman) Holding's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥830m.

Our Take On Prinx Chengshan (Cayman) Holding's Profit Performance

As we discussed above, we think Prinx Chengshan (Cayman) Holding's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Prinx Chengshan (Cayman) Holding's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 43% 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. If you want to do dive deeper into Prinx Chengshan (Cayman) Holding, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with Prinx Chengshan (Cayman) Holding (including 1 which is a bit unpleasant).

This note has only looked at a single factor that sheds light on the nature of Prinx Chengshan (Cayman) Holding's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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