Excellence Commercial Property & Facilities Management Group's (HKG:6989) Earnings Are Built On Soft Foundations

Shareholders didn't seem to be thrilled with Excellence Commercial Property & Facilities Management Group Limited's (HKG:6989) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.

We've discovered 3 warning signs about Excellence Commercial Property & Facilities Management Group. View them for free.

Examining Cashflow Against Excellence Commercial Property & Facilities Management 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. 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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2024, Excellence Commercial Property & Facilities Management Group had an accrual ratio of 0.44. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥572m, in contrast to the aforementioned profit of CN¥312.1m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥572m, this year, indicates high risk. 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.

See our latest analysis for Excellence Commercial Property & Facilities Management Group

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Excellence Commercial Property & Facilities Management Group.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by CN¥48m, in the last year, probably goes some way to explain why its accrual ratio was so weak. 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. Which is hardly surprising, given the name. If Excellence Commercial Property & Facilities Management Group doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Excellence Commercial Property & Facilities Management Group's Profit Performance

Excellence Commercial Property & Facilities Management Group had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Excellence Commercial Property & Facilities Management Group's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Excellence Commercial Property & Facilities Management Group at this point in time. Our analysis shows 3 warning signs for Excellence Commercial Property & Facilities Management Group (2 are a bit unpleasant!) and we strongly recommend you look at these before investing.

Our examination of Excellence Commercial Property & Facilities Management Group 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 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.