Additional Considerations Required While Assessing Xinyuan Property Management Service (Cayman)'s (HKG:1895) Strong Earnings

Xinyuan Property Management Service (Cayman) Ltd. (HKG:1895) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

We've discovered 4 warning signs about Xinyuan Property Management Service (Cayman). View them for free.

Zooming In On Xinyuan Property Management Service (Cayman)'s Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 2024, Xinyuan Property Management Service (Cayman) recorded an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥27m, which is significantly less than its profit of CN¥87.0m. We note, however, that Xinyuan Property Management Service (Cayman) grew its free cash flow over the last year. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

View our latest analysis for Xinyuan Property Management Service (Cayman)

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Xinyuan Property Management Service (Cayman).

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Xinyuan Property Management Service (Cayman)'s profit was boosted by unusual items worth CN¥22m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Xinyuan Property Management Service (Cayman)'s Profit Performance

Summing up, Xinyuan Property Management Service (Cayman) received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Xinyuan Property Management Service (Cayman)'s profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 4 warning signs we've spotted with Xinyuan Property Management Service (Cayman) (including 2 which are a bit unpleasant).

Our examination of Xinyuan Property Management Service (Cayman) has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.