Robust Earnings May Not Tell The Whole Story For SiS Mobile Holdings (HKG:1362)

SiS Mobile Holdings Limited (HKG:1362) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for SiS Mobile Holdings

Examining Cashflow Against SiS Mobile Holdings' 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. 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 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 2022, SiS Mobile Holdings had an accrual ratio of 0.72. 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. Over the last year it actually had negative free cash flow of HK$13m, in contrast to the aforementioned profit of HK$35.0m. It's worth noting that SiS Mobile Holdings generated positive FCF of HK$20m 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 SiS Mobile Holdings.

Our Take On SiS Mobile Holdings' Profit Performance

As we have made quite clear, we're a bit worried that SiS Mobile Holdings didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that SiS Mobile Holdings' underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 63% 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 2 warning signs for SiS Mobile Holdings (1 is potentially serious!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of SiS Mobile Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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.