MayAir Technology (China)'s (SHSE:688376) Earnings Are Of Questionable Quality

Unsurprisingly, MayAir Technology (China) Co., Ltd.'s (SHSE:688376) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

See our latest analysis for MayAir Technology (China)

Examining Cashflow Against MayAir Technology (China)'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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.

MayAir Technology (China) has an accrual ratio of 0.38 for the year to March 2024. 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. Over the last year it actually had negative free cash flow of CN¥242m, in contrast to the aforementioned profit of CN¥175.1m. We also note that MayAir Technology (China)'s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥242m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MayAir Technology (China).

Our Take On MayAir Technology (China)'s Profit Performance

As we have made quite clear, we're a bit worried that MayAir Technology (China) didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that MayAir Technology (China)'s underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 47% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 2 warning signs for MayAir Technology (China) (1 is a bit concerning!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of MayAir Technology (China)'s 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.