Some Investors May Be Willing To Look Past Pacific Millennium Packaging Group's (HKG:1820) Soft Earnings

Soft earnings didn't appear to concern Pacific Millennium Packaging Group Corporation's (HKG:1820) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Pacific Millennium Packaging Group

Examining Cashflow Against Pacific Millennium Packaging 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. 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'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Pacific Millennium Packaging Group has an accrual ratio of -0.13 for the year to December 2023. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥131m, well over the CN¥22.4m it reported in profit. Pacific Millennium Packaging Group did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pacific Millennium Packaging Group.

Our Take On Pacific Millennium Packaging Group's Profit Performance

As we discussed above, Pacific Millennium Packaging Group has perfectly satisfactory free cash flow relative to profit. Because of this, we think Pacific Millennium Packaging Group's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in 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. If you'd like to know more about Pacific Millennium Packaging Group as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Pacific Millennium Packaging Group and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Pacific Millennium Packaging Group'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 that insiders are buying.

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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.