Shareholders Can Be Confident That Dalian Sunasia Tourism HoldingLTD's (SHSE:600593) Earnings Are High Quality

Even though Dalian Sunasia Tourism Holding CO.,LTD (SHSE:600593 ) posted strong earnings, investors appeared to be underwhelmed. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

Check out our latest analysis for Dalian Sunasia Tourism HoldingLTD

Examining Cashflow Against Dalian Sunasia Tourism HoldingLTD's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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, Dalian Sunasia Tourism HoldingLTD had an accrual ratio of -0.10. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of CN¥131m, well over the CN¥33.8m it reported in profit. Dalian Sunasia Tourism HoldingLTD's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. 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 Dalian Sunasia Tourism HoldingLTD.

How Do Unusual Items Influence Profit?

Dalian Sunasia Tourism HoldingLTD's profit was reduced by unusual items worth CN¥27m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Dalian Sunasia Tourism HoldingLTD to produce a higher profit next year, all else being equal.

Our Take On Dalian Sunasia Tourism HoldingLTD's Profit Performance

In conclusion, both Dalian Sunasia Tourism HoldingLTD's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Dalian Sunasia Tourism HoldingLTD's earnings potential is at least as good as it seems, and maybe even better! If you'd like to know more about Dalian Sunasia Tourism HoldingLTD 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 Dalian Sunasia Tourism HoldingLTD (of which 2 are a bit concerning!) you should know about.

After our examination into the nature of Dalian Sunasia Tourism HoldingLTD's profit, we've come away optimistic for the company. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.