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Shareholders appeared unconcerned with Micro-Mechanics (Holdings) Ltd.'s (SGX:5DD) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.
View our latest analysis for Micro-Mechanics (Holdings)
Examining Cashflow Against Micro-Mechanics (Holdings)'s Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Micro-Mechanics (Holdings) has an accrual ratio of -0.13 for the year to June 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of S$12m during the period, dwarfing its reported profit of S$8.04m. Micro-Mechanics (Holdings) did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Micro-Mechanics (Holdings).
Our Take On Micro-Mechanics (Holdings)'s Profit Performance
Micro-Mechanics (Holdings)'s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Micro-Mechanics (Holdings)'s earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. When we did our research, we found 2 warning signs for Micro-Mechanics (Holdings) (1 is potentially serious!) that we believe deserve your full attention.
Today we've zoomed in on a single data point to better understand the nature of Micro-Mechanics (Holdings)'s 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 with high insider ownership.
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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.