Earnings Troubles May Signal Larger Issues for Furniweb Holdings (HKG:8480) Shareholders

A lackluster earnings announcement from Furniweb Holdings Limited (HKG:8480) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

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Zooming In On Furniweb 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Furniweb Holdings has an accrual ratio of -0.15 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM23m during the period, dwarfing its reported profit of RM9.03m. Furniweb Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Furniweb Holdings issued 53% more new shares over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Furniweb Holdings' EPS by clicking here.

A Look At The Impact Of Furniweb Holdings' Dilution On Its Earnings Per Share (EPS)

Furniweb Holdings was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 27%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 27% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Furniweb Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Furniweb Holdings' Profit Performance

In conclusion, Furniweb Holdings has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Having considered these factors, we don't think Furniweb Holdings' statutory profits give an overly harsh view of the business. If you'd like to know more about Furniweb Holdings as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Furniweb Holdings (2 make us uncomfortable) you should be familiar with.

Our examination of Furniweb 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. Some people consider a high return on equity to be a good sign of a quality business. 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.