We Think That There Are Issues Underlying Roiserv Lifestyle Services' (HKG:2146) Earnings

Despite posting some strong earnings, the market for Roiserv Lifestyle Services Co., Ltd.'s (HKG:2146) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Roiserv Lifestyle Services

Zooming In On Roiserv Lifestyle Services' Earnings

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

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2020, Roiserv Lifestyle Services recorded an accrual ratio of 2.01. As a general rule, that bodes poorly for future profitability. 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¥4.2m, in contrast to the aforementioned profit of CN¥263.8m. It's worth noting that Roiserv Lifestyle Services generated positive FCF of CN¥23m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Roiserv Lifestyle Services.

Our Take On Roiserv Lifestyle Services' Profit Performance

As we discussed above, we think Roiserv Lifestyle Services' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Roiserv Lifestyle Services' underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 3 warning signs for Roiserv Lifestyle Services (1 is significant) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Roiserv Lifestyle Services' profit. 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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