Some Investors May Be Willing To Look Past Pizu Group Holdings' (HKG:8053) Soft Earnings

Shareholders appeared unconcerned with Pizu Group Holdings Limited's (HKG:8053) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Pizu Group Holdings

Examining Cashflow Against Pizu Group 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. 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'.

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 March 2021, Pizu Group Holdings recorded an accrual ratio of -0.26. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of CN¥463m during the period, dwarfing its reported profit of CN¥122.5m. Pizu Group Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months. 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.

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

How Do Unusual Items Influence Profit?

Pizu Group Holdings' profit was reduced by unusual items worth CN¥87m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Pizu Group Holdings to produce a higher profit next year, all else being equal.

Our Take On Pizu Group Holdings' Profit Performance

In conclusion, both Pizu Group Holdings' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. After considering all this, we reckon Pizu Group Holdings' statutory profit probably understates its earnings potential! If you'd like to know more about Pizu Group Holdings as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 5 warning signs for Pizu Group Holdings and you'll want to know about these bad boys.

After our examination into the nature of Pizu Group Holdings' profit, we've come away optimistic for the company. 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.

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