BOSA Technology Holdings' (HKG:8140) Soft Earnings Don't Show The Whole Picture

Investors were disappointed with the weak earnings posted by BOSA Technology Holdings Limited (HKG:8140 ). Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

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A Closer Look At BOSA Technology 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 2025, BOSA Technology Holdings recorded an accrual ratio of -0.68. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of HK$42m during the period, dwarfing its reported profit of HK$31.6m. BOSA Technology Holdings did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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

Our Take On BOSA Technology Holdings' Profit Performance

Happily for shareholders, BOSA Technology Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that BOSA Technology Holdings' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 54% per year 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 BOSA Technology Holdings at this point in time. At Simply Wall St, we found 2 warning signs for BOSA Technology Holdings and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of BOSA Technology 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.