Health and Happiness (H&H) International Holdings Limited’s (HKG:1112) Recent indirect earnings figures don’t seem to worry shareholders. We think investors might consider some positive factors beyond the earnings numbers.
Check out our latest analysis for Health and Happiness (H&H) International Holdings
Focus on the profits of Health and Happiness (H&H) International Holdings
As finance nerds already know, the cash flow equalization ratio is a key metric for assessing how well a company’s free cash flow (FCF) matches its earnings. The strike 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 period. This ratio tells us how much of a company’s profit is 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 earnings suggest. While having a accrual ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”
Health and Happiness (H&H) International Holdings has an accrual ratio of -0.11 for the year to December 2021. This indicates that its free cash flow was somewhat higher than its statutory profit. To wit, it produced free cash flow of 1.8 billion Canadian yen during the period, eclipsing its reported profit of 508.5 million Canadian yen. Shareholders of Health and Happiness (H&H) International Holdings are no doubt pleased with the improvement in free cash flow over the past twelve months. That said, there is more to the story. The adjustment rate reflects the impact of unusual items on the statutory profit, at least in part.
This might make you wonder what analysts predict in terms of future profitability. Luckily, you can click here to see an interactive chart outlining future profitability, based on their estimates.
How do unusual items affect profits?
Health and Happiness (H&H) International Holdings’ earnings were reduced by unusual items worth 134 million Canadian yen over the past twelve months, which helped it produce strong cash conversion, such as evidenced by its unusual elements. In a scenario where these unusual items included non-cash charges, we would expect to see a strong accrual ratio, which is exactly what happened in this case. While deductions due to unusual items are disappointing at first, there is a silver lining. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And, after all, that’s exactly what accounting terminology implies. Assuming these unusual expenses do not recur, we would therefore expect Health and Happiness (H&H) International Holdings to produce a higher profit next year, all else being equal.
Our View on Health and Happiness (H&H) International Holdings Earnings Performance
In conclusion, Health and Happiness (H&H) International Holdings’ accrual ratio and its unusual items suggest that its statutory earnings are likely reasonably conservative. Looking at all of these factors, we would say that the underlying earnings capacity of Health and Happiness (H&H) International Holdings is at least as good as the statutory numbers suggest. If you want to learn more about Health and Happiness (H&H) International Holdings as a business, it’s important to be aware of the risks it faces. To help you, we found 4 warning signs (1 is a little nasty!) that you should be aware of before buying shares of Health and Happiness (H&H) International Holdings.
After our review of the nature of Health and Happiness (H&H) International Holdings’ earnings, we came away bullish on the company. But there’s always more to discover if you’re able to focus on the details. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders are buying. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.