Logory Logistics Technology's (HKG:2482) Solid Profits Have Weak Fundamentals

Logory Logistics Technology Co., Ltd. (HKG:2482) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Logory Logistics Technology

A Closer Look At Logory Logistics Technology'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2024, Logory Logistics Technology had an accrual ratio of 0.99. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥199m despite its profit of CN¥20.6m, mentioned above. We also note that Logory Logistics 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¥199m.

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

Our Take On Logory Logistics Technology's Profit Performance

As we discussed above, we think Logory Logistics 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 Logory Logistics Technology's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 Logory Logistics Technology, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Logory Logistics Technology has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Logory Logistics Technology's profit. 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. 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.