Earnings Troubles May Signal Larger Issues for China General Education Group (HKG:2175) Shareholders
A lackluster earnings announcement from China General Education Group Limited (HKG:2175) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.
Zooming In On China General Education 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. To get the accrual ratio we first subtract FCF from 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 profit is not backed by free cashflow.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
China General Education Group has an accrual ratio of 0.30 for the year to August 2025. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of CN¥76.3m, a look at free cash flow indicates it actually burnt through CN¥302m in the last year. We also note that China General Education Group's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥302m.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China General Education Group.
Our Take On China General Education Group's Profit Performance
China General Education Group's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that China General Education Group's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about China General Education Group as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for China General Education Group (2 don't sit too well with us!) and we strongly recommend you look at them before investing.
Today we've zoomed in on a single data point to better understand the nature of China General Education Group's profit. But there are plenty of other ways to inform your opinion of a company. 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.