Earnings Troubles May Signal Larger Issues for Xiamen Yan Palace Bird's Nest Industry (HKG:1497) Shareholders

Xiamen Yan Palace Bird's Nest Industry Co., Ltd.'s (HKG:1497) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for Xiamen Yan Palace Bird's Nest Industry

A Closer Look At Xiamen Yan Palace Bird's Nest Industry'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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2024, Xiamen Yan Palace Bird's Nest Industry recorded an accrual ratio of 0.57. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of CN¥7.9m in the last year, which was a lot less than its statutory profit of CN¥156.4m. Xiamen Yan Palace Bird's Nest Industry's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.

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.

Our Take On Xiamen Yan Palace Bird's Nest Industry's Profit Performance

As we discussed above, we think Xiamen Yan Palace Bird's Nest Industry's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Xiamen Yan Palace Bird's Nest Industry's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Xiamen Yan Palace Bird's Nest Industry at this point in time. While conducting our analysis, we found that Xiamen Yan Palace Bird's Nest Industry has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Xiamen Yan Palace Bird's Nest Industry'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. 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.