EEKA Fashion Holdings's (HKG:3709) Earnings Are Growing But Is There More To The Story?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding EEKA Fashion Holdings (HKG:3709).

It's good to see that over the last twelve months EEKA Fashion Holdings made a profit of CN¥386.3m on revenue of CN¥4.81b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for EEKA Fashion Holdings

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Today, we'll discuss EEKA Fashion Holdings' free cashflow relative to its earnings, and consider what that tells us about the company. 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.

Zooming In On EEKA Fashion Holdings' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to June 2020, EEKA Fashion Holdings recorded an accrual ratio of -0.34. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥984m in the last year, which was a lot more than its statutory profit of CN¥386.3m. EEKA Fashion Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On EEKA Fashion Holdings' Profit Performance

As we discussed above, EEKA Fashion Holdings' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think EEKA Fashion Holdings' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 26% annually, over the last three years. 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. If you want to do dive deeper into EEKA Fashion Holdings, you'd also look into what risks it is currently facing. For example - EEKA Fashion Holdings has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of EEKA Fashion Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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 that insiders are buying to be useful.

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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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