YCIH Green High-Performance Concrete (HKG:1847) Is Growing Earnings But Are They A Good Guide?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding YCIH Green High-Performance Concrete (HKG:1847).

While YCIH Green High-Performance Concrete was able to generate revenue of CN¥3.79b in the last twelve months, we think its profit result of CN¥222.5m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for YCIH Green High-Performance Concrete

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll discuss YCIH Green High-Performance Concrete's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of YCIH Green High-Performance Concrete.

Zooming In On YCIH Green High-Performance Concrete'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2020, YCIH Green High-Performance Concrete had an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥319m, well over the CN¥222.5m it reported in profit. YCIH Green High-Performance Concrete shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On YCIH Green High-Performance Concrete's Profit Performance

YCIH Green High-Performance Concrete's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think YCIH Green High-Performance Concrete'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. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 1 warning sign with YCIH Green High-Performance Concrete, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of YCIH Green High-Performance Concrete'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. 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. 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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