Aeso Holding's (HKG:8341) Earnings Are Of Questionable Quality

Aeso Holding Limited (HKG:8341) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Aeso Holding

Zooming In On Aeso Holding'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Aeso Holding has an accrual ratio of 0.82 for the year to March 2022. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of HK$8.16m, a look at free cash flow indicates it actually burnt through HK$19m in the last year. We also note that Aeso Holding's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of HK$19m.

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

Our Take On Aeso Holding's Profit Performance

As we discussed above, we think Aeso Holding's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Aeso Holding's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 4 warning signs for Aeso Holding (3 shouldn't be ignored) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Aeso Holding's profit. 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 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.