Wing Lee Development Construction Holdings' (HKG:9639) Anemic Earnings Might Be Worse Than You Think

The market wasn't impressed with the soft earnings from Wing Lee Development Construction Holdings Limited (HKG:9639) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

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Zooming In On Wing Lee Development Construction 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2025, Wing Lee Development Construction Holdings recorded an accrual ratio of 0.36. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of HK$55.5m, a look at free cash flow indicates it actually burnt through HK$29m in the last year. We saw that FCF was HK$51m a year ago though, so Wing Lee Development Construction Holdings has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wing Lee Development Construction Holdings.

Our Take On Wing Lee Development Construction Holdings' Profit Performance

As we discussed above, we think Wing Lee Development Construction Holdings' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Wing Lee Development Construction Holdings' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 3 warning signs we've spotted with Wing Lee Development Construction Holdings (including 1 which is a bit concerning).

Today we've zoomed in on a single data point to better understand the nature of Wing Lee Development Construction Holdings' profit. 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.