Vistar Holdings’ promising profits (HKG: 8535) may rest on soft foundations

0

Vistar Holdings Limited (HKG: 8535) A robust earnings report failed to move the market for its stock. We did some research and found some factors of concern in the details.

See our latest analysis for Vistar Holdings

SEHK: 8535 Revenue and Revenue History November 15, 2021

Focus on the profits of Vistar Holdings

A key financial ratio used to measure how well a business converts earnings into free cash flow (FCF) is the accumulation ratio. The accrual ratio subtracts the FCF from the profit for a given period and divides the profit by the average operating assets of the company over that period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.

Therefore, a negative accumulation ratio is positive for the company and a positive accumulation ratio is negative. 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. Notably, some academic evidence suggests that a high accumulation ratio is a bad sign for short-term profits, in general.

Vistar Holdings has an accrual ratio of 0.36 for the year through September 2021. Generally, this bodes poorly for future profitability. And indeed, during the period, the company produced no free cash flow. Even though it reported a profit of HK $ 27.5 million, a free cash flow review indicates that it actually burned HK $ 4.7 million in the past year. It should be noted that Vistar Holdings generated a positive FCF of HK $ 15 million a year ago, so at least they have in the past. The good news for shareholders is that Vistar Holdings’ accumulation ratio was much better last year, so this year’s misreading could simply be a case of a short-term mismatch between earnings and FCF. Shareholders should seek an improvement in cash flow relative to current year earnings, if this is indeed the case.

To note: we always recommend that investors check the strength of the balance sheet. Click here for our analysis of Vistar Holdings’ balance sheet.

Our take on Vistar Holdings earnings performance

As discussed above, we believe Vistar Holdings earnings were not supported by free cash flow, which may be of concern to some investors. For this reason, we believe that Vistar Holdings’ statutory earnings may be a poor indicator of its underlying earnings power and could give investors an overly positive impression of the company. The upside is that his BPA growth over the past year has been truly wonderful, although not a perfect metric. Of course, we’ve only scratched the surface when it comes to analyzing his income; one could also consider margins, forecast growth and return on investment, among other factors. So, if you want to delve deeper into this title, it is crucial to consider the risks it faces. When we did our research we found 2 warning signs for Vistar Holdings (1 should not be ignored!) Which we believe deserves your full attention.

Today we zoomed in on a single data point to better understand the nature of Vistar Holdings earnings. But there are plenty of other ways to give 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.

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 material. Simply Wall St has no position in any of the stocks mentioned.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.


Source link

Share.

Comments are closed.