World-Link Logistics (Asia) Holding's (HKG:6083) Soft Earnings Don't Show The Whole Picture

The market for World-Link Logistics (Asia) Holding Limited's (HKG:6083) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.

Our free stock report includes 3 warning signs investors should be aware of before investing in World-Link Logistics (Asia) Holding. Read for free now.

Zooming In On World-Link Logistics (Asia) Holding's 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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.

Over the twelve months to December 2024, World-Link Logistics (Asia) Holding recorded an accrual ratio of -0.95. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$82m in the last year, which was a lot more than its statutory profit of HK$19.0m. World-Link Logistics (Asia) Holding shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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.

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. Because of this, we think World-Link Logistics (Asia) Holding's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 24% per year 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 World-Link Logistics (Asia) Holding as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with World-Link Logistics (Asia) Holding (including 1 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of World-Link Logistics (Asia) Holding's 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.