My Humble House Hospitality Management Consulting's (TWSE:2739) Strong Earnings Are Of Good Quality

Even though My Humble House Hospitality Management Consulting Co., Ltd. (TWSE:2739 ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.

See our latest analysis for My Humble House Hospitality Management Consulting

A Closer Look At My Humble House Hospitality Management Consulting'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, My Humble House Hospitality Management Consulting had an accrual ratio of -1.29. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$1.4b in the last year, which was a lot more than its statutory profit of NT$590.7m. Over the last year, My Humble House Hospitality Management Consulting's free cash flow remained steady. 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.

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.

How Do Unusual Items Influence Profit?

Surprisingly, given My Humble House Hospitality Management Consulting's accrual ratio implied strong cash conversion, its paper profit was actually boosted by NT$158m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If My Humble House Hospitality Management Consulting doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On My Humble House Hospitality Management Consulting's Profit Performance

My Humble House Hospitality Management Consulting's 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. Considering all the aforementioned, we'd venture that My Humble House Hospitality Management Consulting's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that My Humble House Hospitality Management Consulting is showing 2 warning signs in our investment analysis and 1 of those can't be ignored...

Our examination of My Humble House Hospitality Management Consulting has focussed on certain factors that can make its earnings look better than they are. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.