Some Investors May Be Willing To Look Past Sino ICT Holdings' (HKG:365) Soft Earnings

Sino ICT Holdings Limited's (HKG:365) recent soft profit numbers didn't appear to worry shareholders. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Sino ICT Holdings

Zooming In On Sino ICT Holdings' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2021, Sino ICT Holdings recorded an accrual ratio of -1.03. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of HK$268m in the last year, which was a lot more than its statutory profit of HK$21.2m. Given that Sino ICT Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$268m would seem to be a step in the right direction.

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

Our Take On Sino ICT Holdings' Profit Performance

Happily for shareholders, Sino ICT Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Sino ICT Holdings' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Sino ICT Holdings you should know about.

Today we've zoomed in on a single data point to better understand the nature of Sino ICT 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 that insiders are buying.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.