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The subdued market reaction suggests that Sinostar PEC Holdings Limited's (SGX:C9Q) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.
Examining Cashflow Against Sinostar PEC Holdings' 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. The ratio shows us how much a company's profit exceeds its FCF.
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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to March 2025, Sinostar PEC Holdings had an accrual ratio of -0.15. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of CN¥367m during the period, dwarfing its reported profit of CN¥150.7m. Sinostar PEC Holdings' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sinostar PEC Holdings.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Sinostar PEC Holdings expanded the number of shares on issue by 50% over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Sinostar PEC Holdings' EPS by clicking here.
A Look At The Impact Of Sinostar PEC Holdings' Dilution On Its Earnings Per Share (EPS)
Sinostar PEC Holdings' net profit dropped by 30% per year over the last three years. And even focusing only on the last twelve months, we see profit is down 46%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 52% in the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.