Suzhou Recodeal Interconnect SystemLtd's (SHSE:688800) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Despite Suzhou Recodeal Interconnect System Co.,Ltd's (SHSE:688800) recent earnings report having lackluster headline numbers, the market responded positively. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Suzhou Recodeal Interconnect SystemLtd.

View our latest analysis for Suzhou Recodeal Interconnect SystemLtd

Examining Cashflow Against Suzhou Recodeal Interconnect SystemLtd'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

For the year to March 2024, Suzhou Recodeal Interconnect SystemLtd had an accrual ratio of 0.42. 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. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥407m despite its profit of CN¥137.5m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥407m, 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 Suzhou Recodeal Interconnect SystemLtd's Profit Performance

As we have made quite clear, we're a bit worried that Suzhou Recodeal Interconnect SystemLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Suzhou Recodeal Interconnect SystemLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 15% per annum growth in EPS for the last three. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 2 warning signs for Suzhou Recodeal Interconnect SystemLtd you should be mindful of and 1 of these bad boys is significant.

This note has only looked at a single factor that sheds light on the nature of Suzhou Recodeal Interconnect SystemLtd's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.