Some Investors May Be Willing To Look Past Desun Real Estate Investment Services Group's (HKG:2270) Soft Earnings

Desun Real Estate Investment Services Group Co., Ltd.'s (HKG:2270) earnings announcement last week didn't impress shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

Our free stock report includes 1 warning sign investors should be aware of before investing in Desun Real Estate Investment Services Group. Read for free now.

Zooming In On Desun Real Estate Investment Services Group's 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Desun Real Estate Investment Services Group has an accrual ratio of -0.14 for the year to December 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CN¥56m in the last year, which was a lot more than its statutory profit of CN¥37.0m. Notably, Desun Real Estate Investment Services Group had negative free cash flow last year, so the CN¥56m it produced this year was a welcome improvement. 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.

Check out our latest analysis for Desun Real Estate Investment Services Group

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Desun Real Estate Investment Services Group.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Desun Real Estate Investment Services Group's profit was boosted by unusual items worth CN¥6.3m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. 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 Desun Real Estate Investment Services Group's Profit Performance

Desun Real Estate Investment Services Group's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if Desun Real Estate Investment Services Group's profits are a reasonable reflection of its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for Desun Real Estate Investment Services Group and we think they deserve your attention.

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.