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Over the twelve months to December 2023, Parkson Retail Group recorded an accrual ratio of -0.21. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had *free cash flow of CN¥930m* in the last year, which was a lot more than its *statutory profit of CN¥66.4m*. Given that Parkson Retail Group had negative free cash flow in the prior corresponding period, the trailing twelve month result of CN¥930m would seem to be a step in the right direction.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
*Examining Cashflow Against Parkson Retail Group'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
