Shareholders In Future Machine (HKG:1401) Should Look Beyond Earnings For The Full Story
Strong earnings weren't enough to please Future Machine Limited's (HKG:1401) shareholders over the last week. We did some digging and found some underlying numbers that are worrying.
Zooming In On Future Machine'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to December 2025, Future Machine recorded an accrual ratio of 0.67. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥252m, in contrast to the aforementioned profit of CN¥41.4m. We also note that Future Machine's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥252m. However, that's not the end of the story. We must also consider the impact of unusual items on statutory profit (and thus the accrual ratio), as well as note the ramifications of the company issuing new shares.
See our latest analysis for Future Machine
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Future Machine.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Future Machine expanded the number of shares on issue by 50% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Future Machine's EPS by clicking here.
A Look At The Impact Of Future Machine's Dilution On Its Earnings Per Share (EPS)
As you can see above, Future Machine has been growing its net income over the last few years, with an annualized gain of 537% over three years. In comparison, earnings per share only gained 389% over the same period. And at a glance the 153% gain in profit over the last year impresses. But in comparison, EPS only increased by 147% over the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Future Machine can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.
How Do Unusual Items Influence Profit?
The fact that the company had unusual items boosting profit by CN¥22m, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 Future Machine's positive unusual items were quite significant relative to its profit in the year to December 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 Future Machine's Profit Performance
In conclusion, Future Machine's weak accrual ratio suggested its statutory earnings have been inflated by the unusual items. The dilution means the results are weaker when viewed from a per-share perspective. On reflection, the above-mentioned factors give us the strong impression that Future Machine'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you'd like to know more about Future Machine as a business, it's important to be aware of any risks it's facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Future Machine.
Our examination of Future Machine has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.