Hangzhou Gisway Information TechnologyLtd's (SZSE:301390) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that Hangzhou Gisway Information Technology Co.,Ltd.'s (SZSE:301390) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for Hangzhou Gisway Information TechnologyLtd

A Closer Look At Hangzhou Gisway Information TechnologyLtd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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 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, Hangzhou Gisway Information TechnologyLtd had an accrual ratio of 0.33. 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¥58.3m, a look at free cash flow indicates it actually burnt through CN¥93m in the last year. We also note that Hangzhou Gisway Information TechnologyLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥93m.

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

Our Take On Hangzhou Gisway Information TechnologyLtd's Profit Performance

As we discussed above, we think Hangzhou Gisway Information TechnologyLtd'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 Hangzhou Gisway Information TechnologyLtd's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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 while earnings quality is important, it's equally important to consider the risks facing Hangzhou Gisway Information TechnologyLtd at this point in time. Case in point: We've spotted 3 warning signs for Hangzhou Gisway Information TechnologyLtd you should be mindful of and 1 of them is potentially serious.

Today we've zoomed in on a single data point to better understand the nature of Hangzhou Gisway Information TechnologyLtd'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. 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.