SiS Mobile Holdings Limited (HKG:1362) posted strong gains but the stock has been flat. Our analysis suggests that shareholders noticed something troubling about the numbers.
Check out our latest analysis for SiS Mobile Holdings
Examination of cash flow versus earnings of SiS Mobile Holdings
Many investors have not heard of it Accrual rate from the cash flow, but it’s actually a useful measure of how well a company’s earnings are supported by free cash flow (FCF) over a given period. To get the accrual rate, we first subtract the FCF from the profit for a period and then divide that number by the average operating assets for the period. This ratio tells us how much of a company’s earnings aren’t covered by free cash flow.
Consequently, a negative accrual rate is positive for the company and a positive accrual rate is negative. While it’s not a problem to have a positive accrual rate, which indicates a certain level of non-cash earnings, a high accrual rate is arguably a bad thing, as it indicates that paper earnings don’t correspond to cash flow. In particular, there is some scientific evidence that suggests that high accrual rates generally bode bad for near-term gains.
For the year ended June 2022, SiS Mobile Holdings had a reserve ratio of 0.72. Statistically, this is a real minus for future earnings. The company didn’t generate any free cash flow during that time. It was indeed the case last year negative free cash flow of HK$13m, in contrast to the profit of HK$35.0m mentioned above. It’s worth noting that SiS Mobile Holdings had a positive FCF of HK$20m a year ago, so at least they did in the past.
Note: We always advise investors to review balance sheet strength. Click here for our SiS Mobile Holdings balance sheet analysis.
Our view on SiS Mobile Holdings’ earnings development
As we’ve made clear, we’re somewhat concerned that SiS Mobile Holdings hasn’t been able to support last year’s earnings with free cash flow. As a result, we believe that SiS Mobile Holdings’ underlying earning power may be less than statutory earnings. The good news is that earnings per share are up 63% over the past year. At the end of the day, it’s important to consider more than just the above factors if you want to properly understand the company. With that in mind, we wouldn’t consider investing in a stock unless we fully understand the risks. When we researched, we found what we were looking for 2 warning signs for SiS Mobile Holdings (1 may be serious!) which we believe deserve your full attention.
Today we took a closer look at a single data point to better understand the nature of SiS Mobile Holdings’ earnings. But there are many other ways to express your opinion about a company. For example, many people see a high return on equity as an indication of good business conditions, while others like to “follow the money” and look for stocks that insiders are buying. You might want to see this free Collection of companies with high return on equity or this list of stocks that insiders are buying.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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