Sinostar PEC Holdings Limited's (SGX:C9Q) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.
A Closer Look At Sinostar PEC 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. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Sinostar PEC Holdings has an accrual ratio of -0.15 for the year to December 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥541m in the last year, which was a lot more than its statutory profit of CN¥237.4m. Given that Sinostar PEC Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥541m would seem to be a step in the right direction.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sinostar PEC Holdings.
Our Take On Sinostar PEC Holdings' Profit Performance
As we discussed above, Sinostar PEC Holdings has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Sinostar PEC Holdings' 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 three years. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. We've done some analysis and you can see our take on Sinostar PEC Holdings' balance sheet by clicking here.
This note has only looked at a single factor that sheds light on the nature of Sinostar PEC Holdings' 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. 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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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.