Low profits didn’t seem to worry Limited Legion Consortium (HKG: 2129) shareholders over the past week. We believe the weaker numbers may be offset by some positive underlying factors.
Check out our latest review for Legion Consortium
Review of Cash Flow vs. Earnings of the Legion Consortium
Many investors have not heard of the cash flow adjustment ratio, but it’s actually a useful measure of the extent to which a company’s profit is supported by Free Cash Flow (FCF) over a given period. 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. The ratio shows us by how much a company’s profit exceeds its FCF.
Therefore, it is actually considered a good thing when a company has a negative accumulation ratio, but a bad thing if its accumulation ratio is positive. While having an accumulation ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accumulation ratio. To quote a 2014 article by Lewellen and Resutek, “Firms with higher totals tend to be less profitable in the future.”
Legion Consortium has an accrual ratio of -0.20 for the year up to June 2021. This indicates that its free cash flow has far exceeded its statutory profit. In fact, he had free cash flow of S $ 5.7 million last year, which was far more than his statutory profit of S $ 2.63 million. Legion Consortium’s free cash flow has actually declined over the past year, which is disappointing, as have non-biodegradable balloons. That said, there is more to the story. We note that unusual elements have impacted its statutory income, and therefore the accrual ratio.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of the Legion Consortium’s balance sheet.
The impact of unusual items on profit
In addition to the remarkable rate of accumulation and skyrocketing non-operating income, we can also see that Legion Consortium has enjoyed unusual items valued at S $ 775,000 over the past twelve months. 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. Which is hardly surprising, given the name. Assuming these unusual items do not reappear in the current year, then we would expect profit to be lower next year (in the absence of business growth, i.e. to say).
Our perspective on the profit performance of the Legion Consortium
The Legion Consortium’s profits were boosted by some unusual items indicating they may not be sustained and yet its accumulation ratio still indicated a strong conversion to cash which is promising. Considering all of the above, we venture to say that the Legion Consortium’s profit bottom line is a pretty good guide to its true profitability, albeit a little conservative. With that in mind, we wouldn’t consider investing in a stock unless we have a thorough understanding of the risks. Our analysis shows 5 warning signs for Legion Consortium (1 is a bit nasty!) And we strongly recommend that you watch them before investing.
In this article, we’ve looked at a number of factors that can hinder the usefulness of profit figures, as a guide for a business. But there is always more to be discovered if you are able to focus your mind on the smallest details. 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.
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 any of the stocks mentioned.
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