Some Investors May Be Willing To Look Past Alltronics Holdings' (HKG:833) Soft Earnings

Shareholders appeared unconcerned with Alltronics Holdings Limited's (HKG:833) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Our free stock report includes 2 warning signs investors should be aware of before investing in Alltronics Holdings. Read for free now.

Examining Cashflow Against Alltronics Holdings' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 December 2024, Alltronics Holdings recorded an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of HK$121m in the last year, which was a lot more than its statutory profit of HK$63.1m. Alltronics Holdings' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. 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.

View our latest analysis for Alltronics Holdings

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

How Do Unusual Items Influence Profit?

Surprisingly, given Alltronics Holdings' accrual ratio implied strong cash conversion, its paper profit was actually boosted by HK$7.9m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Alltronics Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Alltronics Holdings' Profit Performance

Alltronics Holdings' profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if Alltronics Holdings' profits are a reasonable reflection of its underlying profitability. If you'd like to know more about Alltronics Holdings as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Alltronics Holdings and we think they deserve your attention.

Our examination of Alltronics Holdings has focussed on certain factors that can make its earnings look better than they are. 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.