We Think You Can Look Beyond Tianjin Saixiang TechnologyLtd's (SZSE:002337) Lackluster Earnings

Shareholders appeared unconcerned with Tianjin Saixiang Technology Co.,Ltd's (SZSE:002337) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Tianjin Saixiang TechnologyLtd

Zooming In On Tianjin Saixiang TechnologyLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Tianjin Saixiang TechnologyLtd had an accrual ratio of 0.25. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of CN¥127m, in contrast to the aforementioned profit of CN¥40.1m. We saw that FCF was CN¥81m a year ago though, so Tianjin Saixiang TechnologyLtd has at least been able to generate positive FCF in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tianjin Saixiang TechnologyLtd.

How Do Unusual Items Influence Profit?

Unfortunately (in the short term) Tianjin Saixiang TechnologyLtd saw its profit reduced by unusual items worth CN¥17m. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Tianjin Saixiang TechnologyLtd took a rather significant hit from unusual items in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Tianjin Saixiang TechnologyLtd's Profit Performance

Tianjin Saixiang TechnologyLtd saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Based on these factors, we think that Tianjin Saixiang TechnologyLtd's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Tianjin Saixiang TechnologyLtd, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for Tianjin Saixiang TechnologyLtd (1 shouldn't be ignored!) and we strongly recommend you look at these before investing.

Our examination of Tianjin Saixiang TechnologyLtd has focussed on certain factors that can make its earnings look better than they are. 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.

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.