MEGAIN Holding (Cayman)'s (HKG:6939) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that MEGAIN Holding (Cayman) Co., Ltd.'s (HKG:6939) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for MEGAIN Holding (Cayman)

Examining Cashflow Against MEGAIN Holding (Cayman)'s 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2024, MEGAIN Holding (Cayman) had an accrual ratio of 0.41. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥36m despite its profit of CN¥8.69m, mentioned above. It's worth noting that MEGAIN Holding (Cayman) generated positive FCF of CN¥44m a year ago, so at least they've done it in the past. One positive for MEGAIN Holding (Cayman) shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MEGAIN Holding (Cayman).

Our Take On MEGAIN Holding (Cayman)'s Profit Performance

As we discussed above, we think MEGAIN Holding (Cayman)'s 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 MEGAIN Holding (Cayman)'s underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into MEGAIN Holding (Cayman), you'd also look into what risks it is currently facing. To help with this, we've discovered 5 warning signs (3 make us uncomfortable!) that you ought to be aware of before buying any shares in MEGAIN Holding (Cayman).

Today we've zoomed in on a single data point to better understand the nature of MEGAIN Holding (Cayman)'s 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. 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.