We Like C&D Holsin Engineering Consulting's (SHSE:603909) Earnings For More Than Just Statutory Profit

The market seemed underwhelmed by last week's earnings announcement from C&D Holsin Engineering Consulting Co., Ltd (SHSE:603909) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for C&D Holsin Engineering Consulting

Examining Cashflow Against C&D Holsin Engineering Consulting'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). 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.

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

C&D Holsin Engineering Consulting has an accrual ratio of -0.57 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥428m, well over the CN¥65.9m it reported in profit. C&D Holsin Engineering Consulting's free cash flow improved over the last year, which is generally good to see.

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 C&D Holsin Engineering Consulting's Profit Performance

Happily for shareholders, C&D Holsin Engineering Consulting produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think C&D Holsin Engineering Consulting's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 40% annually, over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with C&D Holsin Engineering Consulting, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of C&D Holsin Engineering Consulting'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.