Why Dragon Rise Group Holdings' (HKG:6829) Earnings Are Weaker Than They Seem

We didn't see Dragon Rise Group Holdings Limited's (HKG:6829) stock surge when it reported robust earnings recently. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Zooming In On Dragon Rise Group Holdings' 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). 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2025, Dragon Rise Group Holdings recorded an accrual ratio of 0.23. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of HK$49m, in contrast to the aforementioned profit of HK$9.03m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of HK$49m, this year, indicates high risk. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dragon Rise Group Holdings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Dragon Rise Group Holdings increased the number of shares on issue by 140% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. 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 Dragon Rise Group Holdings' EPS by clicking here.

A Look At The Impact Of Dragon Rise Group Holdings' Dilution On Its Earnings Per Share (EPS)

As you can see above, Dragon Rise Group Holdings has been growing its net income over the last few years, with an annualized gain of 22% over three years. But on the other hand, earnings per share actually fell by 36% per year. And at a glance the 116% gain in profit over the last year impresses. But in comparison, EPS only increased by 69% over the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Dragon Rise Group Holdings can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Dragon Rise Group Holdings' Profit Performance

In conclusion, Dragon Rise Group Holdings has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. For the reasons mentioned above, we think that a perfunctory glance at Dragon Rise Group Holdings' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Dragon Rise Group Holdings, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Dragon Rise Group Holdings (2 shouldn't be ignored) you should be familiar with.

Our examination of Dragon Rise Group Holdings 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 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.

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.