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The most recent earnings report from Sinostar PEC Holdings Limited (SGX:C9Q) was disappointing for shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.
Check out our latest analysis for Sinostar PEC Holdings
Examining Cashflow Against 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. 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.
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 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.
Over the twelve months to September 2024, Sinostar PEC Holdings recorded an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of CN¥428m, well over the CN¥162.8m it reported in profit. Sinostar PEC Holdings' free cash flow improved over the last year, which is generally good to see.
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! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Sinostar PEC Holdings, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 3 warning signs with Sinostar PEC Holdings, and understanding them should be part of your investment process.