We Think That There Are Some Issues For BIEM.L.FDLKK GarmentLtd (SZSE:002832) Beyond Its Promising Earnings

BIEM.L.FDLKK Garment Co.,Ltd.'s (SZSE:002832) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for BIEM.L.FDLKK GarmentLtd

A Closer Look At BIEM.L.FDLKK GarmentLtd'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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, BIEM.L.FDLKK GarmentLtd recorded an accrual ratio of 0.35. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. In fact, it had free cash flow of CN¥394m in the last year, which was a lot less than its statutory profit of CN¥972.2m. BIEM.L.FDLKK GarmentLtd shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months.

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 BIEM.L.FDLKK GarmentLtd's Profit Performance

As we discussed above, we think BIEM.L.FDLKK GarmentLtd'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 BIEM.L.FDLKK GarmentLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 62% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 2 warning signs for BIEM.L.FDLKK GarmentLtd (1 is significant) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of BIEM.L.FDLKK GarmentLtd'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.