C&D International Investment Group's (HKG:1908) Earnings Are Weaker Than They Seem

C&D International Investment Group Limited's (HKG:1908) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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Examining Cashflow Against C&D International Investment 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

C&D International Investment Group has an accrual ratio of -0.10 for the year to June 2025. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of CN¥19b during the period, dwarfing its reported profit of CN¥4.37b. Given that C&D International Investment Group had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥19b would seem to be a step in the right direction. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, C&D International Investment Group issued 11% more new shares over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out C&D International Investment Group's historical EPS growth by clicking on this link.

A Look At The Impact Of C&D International Investment Group's Dilution On Its Earnings Per Share (EPS)

As you can see above, C&D International Investment Group has been growing its net income over the last few years, with an annualized gain of 17% over three years. But on the other hand, earnings per share actually fell by 12% per year. And in the last year the company managed to bump profit up by 13%. But in comparison, EPS only increased by 3.6% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if C&D International Investment Group can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On C&D International Investment Group's Profit Performance

In conclusion, C&D International Investment Group has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. Given the contrasting considerations, we don't have a strong view as to whether C&D International Investment Group's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about C&D International Investment Group as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 2 warning signs for C&D International Investment Group and you'll want to know about these.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.