The Strong Earnings Posted By Persistence Resources Group (HKG:2489) Are A Good Indication Of The Strength Of The Business

Investors were underwhelmed by the solid earnings posted by Persistence Resources Group Ltd (HKG:2489) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

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Zooming In On Persistence Resources Group'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2024, Persistence Resources Group recorded an accrual ratio of -0.14. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥163m in the last year, which was a lot more than its statutory profit of CN¥104.8m. Persistence Resources 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 Persistence Resources Group.

Our Take On Persistence Resources Group's Profit Performance

As we discussed above, Persistence Resources Group has perfectly satisfactory free cash flow relative to profit. Because of this, we think Persistence Resources Group's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 22% over 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 1 warning sign for Persistence Resources Group and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Persistence Resources 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. 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 with significant insider holdings to be useful.

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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.