Investors were disappointed with the weak earnings posted by CM Energy Tech Co., Ltd. (HKG:206 ). However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.
A Closer Look At CM Energy Tech'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). 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. 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. 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 June 2025, CM Energy Tech recorded an accrual ratio of -0.32. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of US$38m during the period, dwarfing its reported profit of US$7.10m. CM Energy Tech shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
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The Impact Of Unusual Items On Profit
While the accrual ratio might bode well, we also note that CM Energy Tech's profit was boosted by unusual items worth US$1.1m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On CM Energy Tech's Profit Performance
CM Energy Tech's 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. Considering all the aforementioned, we'd venture that CM Energy Tech's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about CM Energy Tech as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for CM Energy Tech you should know about.
Our examination of CM Energy Tech has focussed on certain factors that can make its earnings look better than they are. 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 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.