Guangdong Seneasy Intelligent TechnologyLtd's (SZSE:301578) Anemic Earnings Might Be Worse Than You Think

The market rallied behind Guangdong Seneasy Intelligent Technology Co.,Ltd.'s (SZSE:301578) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for Guangdong Seneasy Intelligent TechnologyLtd

Examining Cashflow Against Guangdong Seneasy Intelligent TechnologyLtd'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Guangdong Seneasy Intelligent TechnologyLtd has an accrual ratio of 0.68 for the year to March 2024. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥161m, in contrast to the aforementioned profit of CN¥87.3m. We saw that FCF was CN¥28m a year ago though, so Guangdong Seneasy Intelligent TechnologyLtd 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 Guangdong Seneasy Intelligent TechnologyLtd.

Our Take On Guangdong Seneasy Intelligent TechnologyLtd's Profit Performance

As we discussed above, we think Guangdong Seneasy Intelligent TechnologyLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Guangdong Seneasy Intelligent TechnologyLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Nonetheless, it's still worth noting that its earnings per share have grown at 41% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Guangdong Seneasy Intelligent TechnologyLtd, you'd also look into what risks it is currently facing. For example, Guangdong Seneasy Intelligent TechnologyLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Guangdong Seneasy Intelligent TechnologyLtd'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.