There May Be Reason For Hope In Jiangxi Guoguang Commercial Chains' (SHSE:605188) Disappointing Earnings

Jiangxi Guoguang Commercial Chains Co., Ltd.'s (SHSE:605188) stock was strong despite it releasing a soft earnings report last week. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Jiangxi Guoguang Commercial Chains

Examining Cashflow Against Jiangxi Guoguang Commercial Chains' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2024, Jiangxi Guoguang Commercial Chains had an accrual ratio of -0.34. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥170m, well over the CN¥13.8m it reported in profit. 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. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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¥7.1m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. If Jiangxi Guoguang Commercial Chains 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 Jiangxi Guoguang Commercial Chains' Profit Performance

Jiangxi Guoguang Commercial Chains' profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think that Jiangxi Guoguang Commercial Chains' profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Jiangxi Guoguang Commercial Chains as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Jiangxi Guoguang Commercial Chains (of which 1 makes us a bit uncomfortable!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.