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Wall Street JournalWhy Taste Gourmet Group's (HKG:8371) Earnings Are Better Than They Seem
Taste Gourmet Group Limited (HKG:8371) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.
Examining Cashflow Against Taste Gourmet Group's 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. 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.
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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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, Taste Gourmet Group had an accrual ratio of -2.08. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of HK$281m during the period, dwarfing its reported profit of HK$95.5m. Taste Gourmet Group shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Taste Gourmet Group.
Our Take On Taste Gourmet Group's Profit Performance
As we discussed above, Taste Gourmet Group's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Taste Gourmet Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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. You'd be interested to know, that we found 2 warning signs for Taste Gourmet Group and you'll want to know about them.
This note has only looked at a single factor that sheds light on the nature of Taste Gourmet Group'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. 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.