Shareholders Shouldn’t Be Too Comfortable With LC Logistics' (HKG:2490) Strong Earnings

Despite posting strong earnings, LC Logistics, Inc.'s (HKG:2490) stock didn't move much over the last week. We think that investors might be worried about the foundations the earnings are built on.

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Examining Cashflow Against LC Logistics' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 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".

Over the twelve months to December 2024, LC Logistics recorded an accrual ratio of 0.87. 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¥381m despite its profit of CN¥395.8m, mentioned above. We also note that LC Logistics' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥381m. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Check out our latest analysis for LC Logistics

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by CN¥351m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that LC Logistics' positive unusual items were quite significant relative to its profit in the year to December 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On LC Logistics' Profit Performance

Summing up, LC Logistics received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. On reflection, the above-mentioned factors give us the strong impression that LC Logistics'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into LC Logistics, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with LC Logistics, and understanding this should be part of your investment process.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.