Some May Be Optimistic About Convenience Retail Asia's (HKG:831) Earnings

Soft earnings didn't appear to concern Convenience Retail Asia Limited's (HKG:831) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Convenience Retail Asia

A Closer Look At Convenience Retail Asia's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2023, Convenience Retail Asia recorded an accrual ratio of -0.29. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of HK$181m during the period, dwarfing its reported profit of HK$57.7m. Convenience Retail Asia's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Convenience Retail Asia.

Our Take On Convenience Retail Asia's Profit Performance

Happily for shareholders, Convenience Retail Asia produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Convenience Retail Asia's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 3 warning signs for Convenience Retail Asia (1 is concerning!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Convenience Retail Asia's 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. 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 that insiders are buying 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.