KFM Kingdom Holdings' (HKG:3816) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern KFM Kingdom Holdings Limited's (HKG:3816) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for KFM Kingdom Holdings

Examining Cashflow Against KFM Kingdom Holdings' 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2023, KFM Kingdom Holdings recorded an accrual ratio of -0.13. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of HK$55m, well over the HK$19.1m it reported in profit. Notably, KFM Kingdom Holdings had negative free cash flow last year, so the HK$55m it produced this year was a welcome improvement.

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

Our Take On KFM Kingdom Holdings' Profit Performance

As we discussed above, KFM Kingdom Holdings has perfectly satisfactory free cash flow relative to profit. Because of this, we think KFM Kingdom Holdings' earnings potential is at least as good as it seems, and maybe even better! 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. If you'd like to know more about KFM Kingdom Holdings as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 4 warning signs for KFM Kingdom Holdings you should be mindful of and 2 of them are significant.

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

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

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.