Shanghai Automobile Air-Conditioner Accessories' (SHSE:603107) Solid Profits Have Weak Fundamentals

Despite posting some strong earnings, the market for Shanghai Automobile Air-Conditioner Accessories Co., Ltd.'s (SHSE:603107) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Shanghai Automobile Air-Conditioner Accessories

Examining Cashflow Against Shanghai Automobile Air-Conditioner Accessories' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Shanghai Automobile Air-Conditioner Accessories has an accrual ratio of 0.20 for the year to December 2023. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥37m despite its profit of CN¥161.5m, mentioned above. We saw that FCF was CN¥773k a year ago though, so Shanghai Automobile Air-Conditioner Accessories has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Automobile Air-Conditioner Accessories.

Our Take On Shanghai Automobile Air-Conditioner Accessories' Profit Performance

Shanghai Automobile Air-Conditioner Accessories didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Shanghai Automobile Air-Conditioner Accessories' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 20% over the last three years. 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 want to do dive deeper into Shanghai Automobile Air-Conditioner Accessories, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Shanghai Automobile Air-Conditioner Accessories you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Shanghai Automobile Air-Conditioner Accessories' profit. 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. 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.