We Think Xinhua Winshare Publishing and Media's (HKG:811) Solid Earnings Are Understated

The market seemed underwhelmed by last week's earnings announcement from Xinhua Winshare Publishing and Media Co., Ltd. (HKG:811) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

See our latest analysis for Xinhua Winshare Publishing and Media

Examining Cashflow Against Xinhua Winshare Publishing and Media'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.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 2023, Xinhua Winshare Publishing and Media recorded an accrual ratio of -0.14. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥2.2b in the last year, which was a lot more than its statutory profit of CN¥1.58b. Xinhua Winshare Publishing and Media shareholders are no doubt pleased that free cash flow improved over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Xinhua Winshare Publishing and Media's Profit Performance

As we discussed above, Xinhua Winshare Publishing and Media has perfectly satisfactory free cash flow relative to profit. Because of this, we think Xinhua Winshare Publishing and Media's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 25% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Xinhua Winshare Publishing and Media, you'd also look into what risks it is currently facing. When we did our research, we found 2 warning signs for Xinhua Winshare Publishing and Media (1 is a bit concerning!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Xinhua Winshare Publishing and Media'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. 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.