Some Investors May Be Willing To Look Past Yan Tat Group Holdings' (HKG:1480) Soft Earnings

The market for Yan Tat Group Holdings Limited's (HKG:1480) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Yan Tat Group Holdings

Examining Cashflow Against Yan Tat Group 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. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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 2024, Yan Tat Group Holdings recorded an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of HK$102m, well over the HK$65.3m it reported in profit. Yan Tat Group Holdings' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Yan Tat Group Holdings.

Our Take On Yan Tat Group Holdings' Profit Performance

Yan Tat Group Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Yan Tat Group Holdings' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 29% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Yan Tat Group Holdings as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Yan Tat Group Holdings you should know about.

This note has only looked at a single factor that sheds light on the nature of Yan Tat Group Holdings' 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.