Weak Statutory Earnings May Not Tell The Whole Story For Shenzhen Jiang&Associates Creative Design (SZSE:300668)

Investors were disappointed by Shenzhen Jiang&Associates Creative Design Co., Ltd.'s (SZSE:300668 ) latest earnings release. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

See our latest analysis for Shenzhen Jiang&Associates Creative Design

Examining Cashflow Against Shenzhen Jiang&Associates Creative Design's 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, Shenzhen Jiang&Associates Creative Design recorded an accrual ratio of 0.26. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥42.6m, a look at free cash flow indicates it actually burnt through CN¥73m in the last year. It's worth noting that Shenzhen Jiang&Associates Creative Design generated positive FCF of CN¥15m 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 Shenzhen Jiang&Associates Creative Design.

Our Take On Shenzhen Jiang&Associates Creative Design's Profit Performance

Shenzhen Jiang&Associates Creative Design didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Shenzhen Jiang&Associates Creative Design'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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 3 warning signs we've spotted with Shenzhen Jiang&Associates Creative Design (including 2 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of Shenzhen Jiang&Associates Creative Design'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 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.