Stock Analysis

Here's Why We Think World-Link Logistics (Asia) Holding's (HKG:6083) Statutory Earnings Might Be Conservative

  •  Updated
SEHK:6083
Source: Shutterstock

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing World-Link Logistics (Asia) Holding (HKG:6083).

It's good to see that over the last twelve months World-Link Logistics (Asia) Holding made a profit of HK$24.2m on revenue of HK$218.5m. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

See our latest analysis for World-Link Logistics (Asia) Holding

earnings-and-revenue-history
SEHK:6083 Earnings and Revenue History February 18th 2021

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. So today we'll look at what World-Link Logistics (Asia) Holding's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of World-Link Logistics (Asia) Holding.

A Closer Look At World-Link Logistics (Asia) Holding'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2020, World-Link Logistics (Asia) Holding recorded an accrual ratio of -0.90. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of HK$69m, well over the HK$24.2m it reported in profit. World-Link Logistics (Asia) Holding's free cash flow improved over the last year, which is generally good to see.

Our Take On World-Link Logistics (Asia) Holding's Profit Performance

As we discussed above, World-Link Logistics (Asia) Holding's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that World-Link Logistics (Asia) Holding's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing World-Link Logistics (Asia) Holding at this point in time. In terms of investment risks, we've identified 2 warning signs with World-Link Logistics (Asia) Holding, and understanding these should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of World-Link Logistics (Asia) Holding's 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.

If you’re looking to trade World-Link Logistics (Asia) Holding, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether World-Link Logistics (Asia) Holding is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis