Investors Can Find Comfort In Honliv Healthcare Management Group's (HKG:9906) Earnings Quality

Soft earnings didn't appear to concern Honliv Healthcare Management Group Company Limited's (HKG:9906) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Honliv Healthcare Management Group

A Closer Look At Honliv Healthcare Management Group's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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.

Honliv Healthcare Management Group has an accrual ratio of -0.12 for the year to December 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CN¥75m in the last year, which was a lot more than its statutory profit of CN¥21.8m. Honliv Healthcare Management Group shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Honliv Healthcare Management Group.

Our Take On Honliv Healthcare Management Group's Profit Performance

As we discussed above, Honliv Healthcare Management Group has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Honliv Healthcare Management Group'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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, Honliv Healthcare Management Group has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Honliv Healthcare Management Group'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. 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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