There May Be Some Bright Spots In Green Economy Development's (HKG:1315) Earnings
A lackluster earnings announcement from Green Economy Development Limited (HKG:1315) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.
Zooming In On Green Economy Development's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Green Economy Development has an accrual ratio of -0.32 for the year to September 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of HK$59m during the period, dwarfing its reported profit of HK$26.6m. Green Economy Development's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
Check out our latest analysis for Green Economy Development
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Green Economy Development.
How Do Unusual Items Influence Profit?
While the accrual ratio might bode well, we also note that Green Economy Development's profit was boosted by unusual items worth HK$32m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that Green Economy Development's positive unusual items were quite significant relative to its profit in the year to September 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.
Our Take On Green Economy Development's Profit Performance
In conclusion, Green Economy Development's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Green Economy Development's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Green Economy Development, you'd also look into what risks it is currently facing. For example - Green Economy Development has 3 warning signs we think you should be aware of.
Our examination of Green Economy Development has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.