Shareholders didn't appear too concerned by Anji Microelectronics Technology (Shanghai) Co., Ltd.'s (SHSE:688019) weak earnings. Our analysis suggests that they may be missing some concerning details underlying the profit numbers.

See our latest analysis for Anji Microelectronics Technology (Shanghai)

Examining Cashflow Against Anji Microelectronics Technology (Shanghai)'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2021, Anji Microelectronics Technology (Shanghai) had an accrual ratio of 0.68. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥180m, in contrast to the aforementioned profit of CN¥125.1m. It's worth noting that Anji Microelectronics Technology (Shanghai) generated positive FCF of CN¥9.1m a year ago, so at least they've done it in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Anji Microelectronics Technology (Shanghai)'s profit was boosted by unusual items worth CN¥34m 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. Which is hardly surprising, given the name. We can see that Anji Microelectronics Technology (Shanghai)'s positive unusual items were quite significant relative to its profit in the year to December 2021. 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 Anji Microelectronics Technology (Shanghai)'s Profit Performance

Summing up, Anji Microelectronics Technology (Shanghai) received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Anji Microelectronics Technology (Shanghai)'s statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Anji Microelectronics Technology (Shanghai), you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Anji Microelectronics Technology (Shanghai) (of which 1 is a bit concerning!) you should know about.

Our examination of Anji Microelectronics Technology (Shanghai) 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. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.