Solid Earnings Reflect Virscend Education's (HKG:1565) Strength As A Business

Even though Virscend Education Company Limited's (HKG:1565) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

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Examining Cashflow Against Virscend Education's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual 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 time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Virscend Education has an accrual ratio of -0.13 for the year to August 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CN¥380m in the last year, which was a lot more than its statutory profit of CN¥57.7m. Virscend Education's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Virscend Education.

Our Take On Virscend Education's Profit Performance

As we discussed above, Virscend Education has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Virscend Education's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Virscend Education as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Virscend Education (1 is concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Virscend Education's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.