We Like Medialink Group's (HKG:2230) Earnings For More Than Just Statutory Profit

The market seemed underwhelmed by the solid earnings posted by Medialink Group Limited (HKG:2230) recently. Our analysis suggests that there are some reasons for hope that investors should be aware of.

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A Closer Look At Medialink 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). 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.

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. 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".

Medialink Group has an accrual ratio of -0.22 for the year to March 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$121m in the last year, which was a lot more than its statutory profit of HK$52.3m. Given that Medialink Group had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$121m would seem to be a step in the right direction. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

View our latest analysis for Medialink Group

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

How Do Unusual Items Influence Profit?

Medialink Group's profit was reduced by unusual items worth HK$65m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. In the twelve months to March 2025, Medialink Group had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Medialink Group's Profit Performance

Considering both Medialink Group's accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. After considering all this, we reckon Medialink Group's statutory profit probably understates its earnings potential! If you want to do dive deeper into Medialink Group, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Medialink Group you should be aware of.

After our examination into the nature of Medialink Group's profit, we've come away optimistic for the company. But there are plenty of other ways to inform your opinion of a company. 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.