Suzhou Planning & Design Research InstituteLtd's (SZSE:301505) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that Suzhou Planning & Design Research Institute Co.,Ltd.'s (SZSE:301505) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Suzhou Planning & Design Research InstituteLtd

A Closer Look At Suzhou Planning & Design Research InstituteLtd'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.

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".

Suzhou Planning & Design Research InstituteLtd has an accrual ratio of 0.30 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. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥45m despite its profit of CN¥78.1m, mentioned above. We saw that FCF was CN¥24m a year ago though, so Suzhou Planning & Design Research InstituteLtd has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Suzhou Planning & Design Research InstituteLtd.

Our Take On Suzhou Planning & Design Research InstituteLtd's Profit Performance

Suzhou Planning & Design Research InstituteLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Suzhou Planning & Design Research InstituteLtd's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Our analysis shows 4 warning signs for Suzhou Planning & Design Research InstituteLtd (3 are significant!) and we strongly recommend you look at these before investing.

Today we've zoomed in on a single data point to better understand the nature of Suzhou Planning & Design Research InstituteLtd'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. 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.