Despite posting some strong earnings, the market for Shenzhen Kingkey Smart Agriculture Times Co.,Ltd's (SZSE:000048) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.
Zooming In On Shenzhen Kingkey Smart Agriculture TimesLtd's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 2023, Shenzhen Kingkey Smart Agriculture TimesLtd had an accrual ratio of 0.83. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥1.75b, a look at free cash flow indicates it actually burnt through CN¥1.4b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥1.4b, this year, indicates high risk.
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.
Our Take On Shenzhen Kingkey Smart Agriculture TimesLtd's Profit Performance
As we discussed above, we think Shenzhen Kingkey Smart Agriculture TimesLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Shenzhen Kingkey Smart Agriculture TimesLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Shenzhen Kingkey Smart Agriculture TimesLtd, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Shenzhen Kingkey Smart Agriculture TimesLtd, and understanding them should be part of your investment process.
This note has only looked at a single factor that sheds light on the nature of Shenzhen Kingkey Smart Agriculture TimesLtd's profit. 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.
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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.