But'one Information CorporationXi'an's (SHSE:600455) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The subdued market reaction suggests that But'one Information Corporation,Xi'an's (SHSE:600455) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for But'one Information CorporationXi'an

Examining Cashflow Against But'one Information CorporationXi'an'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). 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'.

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. 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, But'one Information CorporationXi'an had an accrual ratio of 0.31. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥91m despite its profit of CN¥26.3m, mentioned above. We saw that FCF was CN¥76m a year ago though, so But'one Information CorporationXi'an has at least been able to generate positive FCF in the past. The good news for shareholders is that But'one Information CorporationXi'an's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of But'one Information CorporationXi'an.

Our Take On But'one Information CorporationXi'an's Profit Performance

But'one Information CorporationXi'an's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that But'one Information CorporationXi'an's statutory profits are better than its underlying earnings power. 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'd like to know more about But'one Information CorporationXi'an as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for But'one Information CorporationXi'an and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of But'one Information CorporationXi'an'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. 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.