Shareholders can be confident that D&G Technology Holding (HKG: 1301) profits are of high quality
D&G Technology Holding Company Limited (HKG: 1301) reported strong earnings, but the stock stagnated. We did some research and found some factors of concern in the details.
See our latest analysis for D&G Technology Holding
Review of cash flow versus earnings of D&G Technology Holding
As finance nerds already know, the cash flow adjustment ratio is a key metric for assessing how well a business’s free cash flow (FCF) matches its profits. To get the accrual ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.
This means that a negative accrual ratio is a good thing, because it shows that the company is generating more free cash flow than its profits suggest. While it is not a problem to have a positive accumulation ratio, indicating a certain level of non-cash profits, a high accumulation ratio is arguably a bad thing, as it indicates that paper profits do not match. to cash flow. Notably, some academic evidence suggests that a high accumulation ratio is a bad sign for short-term profits, in general.
D&G Technology Holding has an accumulation ratio of -0.21 for the year up to June 2021. This implies that it has a very good cash conversion and that its profits for the last year significantly underestimate its free cash flow. Indeed, over the past twelve months, it has reported free cash flow of CND 134 million, well above the CN 18.0 million it reported in profit. D&G Technology Holding’s free cash flow has improved over the past year, which is generally good to see. That said, there is more to the story. The accruals ratio reflects the impact of unusual items on statutory profit, at least in part.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of D&G Technology Holding’s balance sheet.
How do unusual items influence profit?
Surprisingly, since D&G Technology Holding’s accrual ratio involved a large cash conversion, its profit on paper was actually increased by CN 21 million in unusual items. We cannot deny that higher profits generally leave us optimistic, but we would prefer the profits to be sustainable. We have analyzed the numbers of most of the listed companies in the world, and it is very common for unusual items to be unique in nature. And, after all, that’s exactly what accounting terminology implies. We can see that the positive unusual items of D&G Technology Holding were quite large compared to its profit until June 2021. Accordingly, we can assume that the unusual items make its statutory profit significantly higher than it would otherwise be. .
Our point of view on the profit performance of D&G Technology Holding
D&G Technology Holding’s earnings were boosted by unusual items indicating they may not be sustained and yet its accumulation ratio still indicated a strong conversion to cash which is promising. Given the contrasting considerations, we do not have a strong opinion on whether D&G Technology Holding’s earnings reflect its underlying profit potential. Keep in mind that when it comes to analyzing a stock, it is worth noting the risks involved. To help you, we have discovered 3 warning signs (1 cannot be ignored!) Which you should know before buying D&G Technology Holding shares.
Our review of D&G Technology Holding focused on certain factors that may make its profits appear better than they are. But there are plenty of other ways to tell your opinion about a business. Some people consider a high return on equity to be a good sign of a quality business. Although it may take a bit of research on your behalf, you can find this free set of companies offering a high return on equity, or that list of stocks that insiders buy to be useful.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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