Stock Analysis

We Think That There Are Some Issues For Unity Enterprise Holdings (HKG:2195) Beyond Its Promising Earnings

SEHK:2195
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Unity Enterprise Holdings Limited's (HKG:2195) robust recent earnings didn't do much to move the stock. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Unity Enterprise Holdings

earnings-and-revenue-history
SEHK:2195 Earnings and Revenue History September 21st 2021

Examining Cashflow Against Unity Enterprise 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'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2021, Unity Enterprise Holdings had an accrual ratio of 1.20. 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 HK$38.9m, a look at free cash flow indicates it actually burnt through HK$30m in the last year. We saw that FCF was HK$18m a year ago though, so Unity Enterprise Holdings has at least been able to generate positive FCF in the past.

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

Our Take On Unity Enterprise Holdings' Profit Performance

As we discussed above, we think Unity Enterprise Holdings' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Unity Enterprise Holdings' underlying earnings power is lower than its statutory profit. The good news is that its earnings per share increased slightly in the last year. 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 help with this, we've discovered 3 warning signs (1 is a bit unpleasant!) that you ought to be aware of before buying any shares in Unity Enterprise Holdings.

Today we've zoomed in on a single data point to better understand the nature of Unity Enterprise Holdings' 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. 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.
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