Shareholders Will Be Pleased With The Quality of Build King Holdings' (HKG:240) Earnings

The subdued stock price reaction suggests that Build King Holdings Limited's (HKG:240) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

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Zooming In On Build King 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Build King Holdings has an accrual ratio of -0.15 for the year to June 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of HK$559m, well over the HK$464.4m it reported in profit. Build King Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Build King Holdings' Profit Performance

As we discussed above, Build King Holdings has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Build King Holdings' statutory profit actually understates its earnings potential! And the EPS is up 34% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Build King Holdings at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Build King Holdings.

Today we've zoomed in on a single data point to better understand the nature of Build King 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. 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.