Investors Shouldn't Be Too Comfortable With Fujian Supertch Advanced MaterialLtd's (SHSE:688398) Earnings

Fujian Supertch Advanced Material CO.,Ltd. (SHSE:688398) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for Fujian Supertch Advanced MaterialLtd

Examining Cashflow Against Fujian Supertch Advanced MaterialLtd'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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Fujian Supertch Advanced MaterialLtd has an accrual ratio of 0.33 for the year to December 2023. 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. Even though it reported a profit of CN¥106.1m, a look at free cash flow indicates it actually burnt through CN¥189m 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¥189m, 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 Fujian Supertch Advanced MaterialLtd's Profit Performance

As we discussed above, we think Fujian Supertch Advanced MaterialLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Fujian Supertch Advanced MaterialLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 8.2% per annum growth in EPS for the last three. 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. For example - Fujian Supertch Advanced MaterialLtd has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Fujian Supertch Advanced MaterialLtd'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.