Stock Analysis

Is There More To The Story Than Zhaobangji Properties Holdings' (HKG:1660) Earnings Growth?

SEHK:1660
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Broadly speaking, profitable businesses are less risky than 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 Zhaobangji Properties Holdings' (HKG:1660) statutory profits are a good guide to its underlying earnings.

We like the fact that Zhaobangji Properties Holdings made a profit of HK$60.9m on its revenue of HK$231.3m, in the last year. Happily, it has grown both its profit and revenue over the last three years (though we note its revenue is down over the last year).

See our latest analysis for Zhaobangji Properties Holdings

earnings-and-revenue-history
SEHK:1660 Earnings and Revenue History February 15th 2021

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. As a result, we think it's well worth considering what Zhaobangji Properties Holdings' cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhaobangji Properties Holdings.

Examining Cashflow Against Zhaobangji Properties 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). 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2020, Zhaobangji Properties Holdings had an accrual ratio of -0.21. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$124m in the last year, which was a lot more than its statutory profit of HK$60.9m. Given that Zhaobangji Properties Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$124m would seem to be a step in the right direction.

Our Take On Zhaobangji Properties Holdings' Profit Performance

As we discussed above, Zhaobangji Properties Holdings' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Zhaobangji Properties Holdings' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. We've done some analysis and you can see our take on Zhaobangji Properties Holdings' balance sheet by clicking here.

Today we've zoomed in on a single data point to better understand the nature of Zhaobangji Properties Holdings' profit. 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 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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