SAN BIAN SCIENCE& TECHNOLOGY's (SZSE:002112) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for SAN BIAN SCIENCE& TECHNOLOGY Co., LTD.'s (SZSE:002112) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for SAN BIAN SCIENCE& TECHNOLOGY

Zooming In On SAN BIAN SCIENCE& TECHNOLOGY'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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. 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, SAN BIAN SCIENCE& TECHNOLOGY had an accrual ratio of 0.28. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of CN¥108.4m, a look at free cash flow indicates it actually burnt through CN¥192m 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¥192m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SAN BIAN SCIENCE& TECHNOLOGY.

Our Take On SAN BIAN SCIENCE& TECHNOLOGY's Profit Performance

SAN BIAN SCIENCE& TECHNOLOGY's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that SAN BIAN SCIENCE& TECHNOLOGY's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that SAN BIAN SCIENCE& TECHNOLOGY has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of SAN BIAN SCIENCE& TECHNOLOGY'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.