A lackluster earnings announcement from Suzhou Planning & Design Research Institute Co.,Ltd. (SZSE:301505) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.
A Closer Look At Suzhou Planning & Design Research InstituteLtd's 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). 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'.
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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 March 2024, Suzhou Planning & Design Research InstituteLtd recorded an accrual ratio of 0.30. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥48m despite its profit of CN¥77.6m, mentioned above. It's worth noting that Suzhou Planning & Design Research InstituteLtd generated positive FCF of CN¥22m a year ago, so at least they've done it in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Suzhou Planning & Design Research InstituteLtd.
Our Take On Suzhou Planning & Design Research InstituteLtd's Profit Performance
Suzhou Planning & Design Research InstituteLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Suzhou Planning & Design Research InstituteLtd's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Suzhou Planning & Design Research InstituteLtd as a business, it's important to be aware of any risks it's facing. For example, we've found that Suzhou Planning & Design Research InstituteLtd has 3 warning signs (2 are significant!) that deserve your attention before going any further with your analysis.
This note has only looked at a single factor that sheds light on the nature of Suzhou Planning & Design Research InstituteLtd's profit. 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. 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.