Meilleure Health International Industry Group's (HKG:2327) Weak Earnings May Only Reveal A Part Of The Whole Picture

A lackluster earnings announcement from Meilleure Health International Industry Group Limited (HKG:2327) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

We've discovered 1 warning sign about Meilleure Health International Industry Group. View them for free.

Zooming In On Meilleure Health International Industry Group's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 December 2024, Meilleure Health International Industry Group had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of HK$186m in the last year, which was a lot more than its statutory profit of HK$32.5m. Given that Meilleure Health International Industry Group had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$186m would seem to be a step in the right direction. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Meilleure Health International Industry Group

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Meilleure Health International Industry Group.

How Do Unusual Items Influence Profit?

Surprisingly, given Meilleure Health International Industry Group's accrual ratio implied strong cash conversion, its paper profit was actually boosted by HK$24m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Meilleure Health International Industry Group's positive unusual items were quite significant relative to its profit in the year to December 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Meilleure Health International Industry Group's Profit Performance

In conclusion, Meilleure Health International Industry Group's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, we think it's very unlikely that Meilleure Health International Industry Group's statutory profits make it seem much weaker than it is. If you'd like to know more about Meilleure Health International Industry Group as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Meilleure Health International Industry Group and we think they deserve your attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings 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.