Wuling Motors Holdings' (HKG:305) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from Wuling Motors Holdings Limited (HKG:305) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for Wuling Motors Holdings

A Closer Look At Wuling Motors Holdings' 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). 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to June 2024, Wuling Motors Holdings recorded an accrual ratio of 1.40. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥23.5m, a look at free cash flow indicates it actually burnt through CN¥6.2b in the last year. We also note that Wuling Motors Holdings' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥6.2b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wuling Motors Holdings.

Our Take On Wuling Motors Holdings' Profit Performance

As we discussed above, we think Wuling Motors Holdings' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Wuling Motors Holdings' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To that end, you should learn about the 2 warning signs we've spotted with Wuling Motors Holdings (including 1 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of Wuling Motors Holdings' 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. 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.