Jiangxi Guoguang Commercial Chains' (SHSE:605188) Earnings Seem To Be Promising

The stock price didn't jump after Jiangxi Guoguang Commercial Chains Co., Ltd. (SHSE:605188) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

Check out our latest analysis for Jiangxi Guoguang Commercial Chains

Examining Cashflow Against Jiangxi Guoguang Commercial Chains' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Jiangxi Guoguang Commercial Chains has an accrual ratio of -0.33 for the year to September 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥139m in the last year, which was a lot more than its statutory profit of CN¥11.0m. Jiangxi Guoguang Commercial Chains shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. 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 Jiangxi Guoguang Commercial Chains.

How Do Unusual Items Influence Profit?

Surprisingly, given Jiangxi Guoguang Commercial Chains' accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥14m in unusual items. 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. Which is hardly surprising, given the name. We can see that Jiangxi Guoguang Commercial Chains' positive unusual items were quite significant relative to its profit in the year to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Jiangxi Guoguang Commercial Chains' Profit Performance

In conclusion, Jiangxi Guoguang Commercial Chains' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Jiangxi Guoguang Commercial Chains' profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing Jiangxi Guoguang Commercial Chains at this point in time. To help with this, we've discovered 2 warning signs (1 shouldn't be ignored!) that you ought to be aware of before buying any shares in Jiangxi Guoguang Commercial Chains.

Our examination of Jiangxi Guoguang Commercial Chains has focussed on certain factors that can make its earnings look better than they are. 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. 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 with significant insider holdings 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.