Valuetronics Holdings Limited's (SGX:BN2) recent earnings report didn't offer any surprises, with the shares unchanged over the last week.  We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.    

SGX:BN2 Earnings and Revenue History June 4th 2024

Examining Cashflow Against Valuetronics Holdings' 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.  This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive.  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.  That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Valuetronics Holdings had an accrual ratio of -0.18.   That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow.    In fact, it had free cash flow of HK$213m in the last year, which was a lot more than its statutory profit of HK$159.6m.    Valuetronics Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.  

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 Valuetronics Holdings' Profit Performance

As we discussed above, Valuetronics Holdings' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company.      Based on this observation, we consider it possible that Valuetronics Holdings' statutory profit actually understates its earnings potential!    And on top of that, its earnings per share increased by 33% in 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.    While conducting our analysis, we found that Valuetronics Holdings has 1 warning sign and it would be unwise to ignore this.  

Today we've zoomed in on a single data point to better understand the nature of Valuetronics Holdings' 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 with significant insider holdings to be useful.  

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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.