Sun Art Retail Group (HKG:6808) Is Growing Earnings But Are They A Good Guide?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Sun Art Retail Group's (HKG:6808) statutory profits are a good guide to its underlying earnings.

While Sun Art Retail Group was able to generate revenue of CN¥97.9b in the last twelve months, we think its profit result of CN¥3.13b was more important. The chart below shows how profit has actually increased over the last three years, even while revenue has declined.

See our latest analysis for Sun Art Retail Group

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Sun Art Retail Group's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

A Closer Look At Sun Art Retail Group's 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). 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 2020, Sun Art Retail Group recorded an accrual ratio of -0.51. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥8.5b in the last year, which was a lot more than its statutory profit of CN¥3.13b. Sun Art Retail Group shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Sun Art Retail Group's Profit Performance

As we discussed above, Sun Art Retail Group's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Sun Art Retail Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 8.1% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.

This note has only looked at a single factor that sheds light on the nature of Sun Art Retail Group's profit. 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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This article by Simply Wall St is general in nature. 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.
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