The Strong Earnings Posted By Wine's Link International Holdings (HKG:8509) Are A Good Indication Of The Strength Of The Business

Wine's Link International Holdings Limited's (HKG:8509) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for Wine's Link International Holdings

Examining Cashflow Against Wine's Link International Holdings' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Wine's Link International Holdings has an accrual ratio of -0.38 for the year to March 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$149m in the last year, which was a lot more than its statutory profit of HK$27.6m. Given that Wine's Link International Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of HK$149m would seem to be a step in the right direction. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wine's Link International Holdings.

The Impact Of Unusual Items On Profit

Surprisingly, given Wine's Link International Holdings' accrual ratio implied strong cash conversion, its paper profit was actually boosted by HK$3.0m in unusual items. 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. 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 Wine's Link International Holdings' Profit Performance

In conclusion, Wine's Link International Holdings' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, we think that Wine's Link International Holdings' profits are a reasonably conservative guide to its underlying profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Wine's Link International Holdings has 2 warning signs we think you should be aware of.

Our examination of Wine's Link International Holdings has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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