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

Investors were disappointed by Guangdong Seneasy Intelligent Technology Co.,Ltd.'s (SZSE:301578 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

See our latest analysis for Guangdong Seneasy Intelligent TechnologyLtd

Examining Cashflow Against Guangdong Seneasy Intelligent TechnologyLtd'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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

Over the twelve months to September 2024, Guangdong Seneasy Intelligent TechnologyLtd recorded an accrual ratio of 0.57. Statistically speaking, that's a real negative for future earnings. 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¥215m, in contrast to the aforementioned profit of CN¥58.6m. It's worth noting that Guangdong Seneasy Intelligent TechnologyLtd generated positive FCF of CN¥6.7m a year ago, so at least they've done it 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. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Guangdong Seneasy Intelligent TechnologyLtd, you'd also look into what risks it is currently facing. When we did our research, we found 4 warning signs for Guangdong Seneasy Intelligent TechnologyLtd (2 are a bit concerning!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Guangdong Seneasy Intelligent TechnologyLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.