We Think That There Are Issues Underlying G.H.Y Culture & Media Holding's (SGX:XJB) Earnings

G.H.Y Culture & Media Holding Co., Limited's (SGX:XJB) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

View our latest analysis for G.H.Y Culture & Media Holding

A Closer Look At G.H.Y Culture & Media 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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 2020, G.H.Y Culture & Media Holding recorded an accrual ratio of 0.91. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. Indeed, in the last twelve months it reported free cash flow of S$11m, which is significantly less than its profit of S$38.1m. Notably, G.H.Y Culture & Media Holding had negative free cash flow last year, so the S$11m it produced this year was a welcome improvement.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On G.H.Y Culture & Media Holding's Profit Performance

As we discussed above, we think G.H.Y Culture & Media Holding's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that G.H.Y Culture & Media Holding's underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. So while earnings quality is important, it's equally important to consider the risks facing G.H.Y Culture & Media Holding at this point in time. For example - G.H.Y Culture & Media Holding has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of G.H.Y Culture & Media Holding's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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