Concerns Surrounding NCS Testing Technology's (SZSE:300797) Performance

The recent earnings posted by NCS Testing Technology Co., Ltd. (SZSE:300797) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for NCS Testing Technology

Zooming In On NCS Testing Technology'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

NCS Testing Technology has an accrual ratio of 0.28 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of CN¥127.9m, a look at free cash flow indicates it actually burnt through CN¥111m in the last year. We also note that NCS Testing Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥111m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of NCS Testing Technology.

Our Take On NCS Testing Technology's Profit Performance

NCS Testing Technology didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that NCS Testing Technology's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 45% per annum growth in EPS for the last three. 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. If you'd like to know more about NCS Testing Technology as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for NCS Testing Technology (1 makes us a bit uncomfortable) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of NCS Testing 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. 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.