AMS Public Transport Holdings' (HKG:77) Solid Earnings Have Been Accounted For Conservatively

AMS Public Transport Holdings Limited's (HKG:77) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for AMS Public Transport Holdings

Examining Cashflow Against AMS Public Transport Holdings' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

AMS Public Transport Holdings has an accrual ratio of -0.48 for the year to March 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of HK$115m, well over the HK$21.8m it reported in profit. AMS Public Transport Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AMS Public Transport Holdings.

The Impact Of Unusual Items On Profit

Surprisingly, given AMS Public Transport Holdings' accrual ratio implied strong cash conversion, its paper profit was actually boosted by HK$33m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. We can see that AMS Public Transport Holdings' positive unusual items were quite significant relative to its profit in the year to March 2021. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On AMS Public Transport Holdings' Profit Performance

AMS Public Transport Holdings' profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Given the contrasting considerations, we don't have a strong view as to whether AMS Public Transport Holdings's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into AMS Public Transport Holdings, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 4 warning signs for AMS Public Transport Holdings and you'll want to know about these.

Our examination of AMS Public Transport Holdings has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.

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