LAY-OUT Planning Consultants (SZSE:300989) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Investors were disappointed with LAY-OUT Planning Consultants Co. Ltd.'s (SZSE:300989) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for LAY-OUT Planning Consultants

Zooming In On LAY-OUT Planning Consultants' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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. 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, LAY-OUT Planning Consultants had an accrual ratio of 0.21. 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¥43.7m, a look at free cash flow indicates it actually burnt through CN¥23m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥23m, this year, indicates high risk. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of LAY-OUT Planning Consultants.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by CN¥4.4m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If LAY-OUT Planning Consultants doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On LAY-OUT Planning Consultants' Profit Performance

Summing up, LAY-OUT Planning Consultants received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue LAY-OUT Planning Consultants' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into LAY-OUT Planning Consultants, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 3 warning signs with LAY-OUT Planning Consultants, and understanding them should be part of your investment process.

Our examination of LAY-OUT Planning Consultants has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.