Pico Far East Holdings' (HKG:752) Earnings Seem To Be Promising

Investors signalled that they were pleased with Pico Far East Holdings Limited's (HKG:752) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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Examining Cashflow Against Pico Far East Holdings' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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.

For the year to April 2025, Pico Far East Holdings had an accrual ratio of -0.52. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$889m in the last year, which was a lot more than its statutory profit of HK$378.2m. Pico Far East Holdings 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 Pico Far East Holdings.

Our Take On Pico Far East Holdings' Profit Performance

Happily for shareholders, Pico Far East Holdings produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Pico Far East Holdings' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Case in point: We've spotted 1 warning sign for Pico Far East Holdings you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Pico Far East Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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.