Earnings Troubles May Signal Larger Issues for Maiyue Technology (HKG:2501) Shareholders

The market rallied behind Maiyue Technology Limited's (HKG:2501) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Maiyue Technology.

See our latest analysis for Maiyue Technology

Zooming In On Maiyue Technology'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Maiyue Technology has an accrual ratio of 0.64 for the year to December 2023. 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. Even though it reported a profit of CN¥22.9m, a look at free cash flow indicates it actually burnt through CN¥155m in the last year. We also note that Maiyue Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥155m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Maiyue Technology.

Our Take On Maiyue Technology's Profit Performance

As we discussed above, we think Maiyue Technology'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 Maiyue Technology's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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'd like to know more about Maiyue Technology as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Maiyue Technology (1 doesn't sit too well with us!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Maiyue Technology'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. 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. 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.