Solid Earnings Reflect SINOPEC Shandong Taishan Pectroleum's (SZSE:000554) Strength As A Business

SINOPEC Shandong Taishan Pectroleum Co., Ltd. (SZSE:000554) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

View our latest analysis for SINOPEC Shandong Taishan Pectroleum

A Closer Look At SINOPEC Shandong Taishan Pectroleum'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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 September 2024, SINOPEC Shandong Taishan Pectroleum recorded an accrual ratio of -0.59. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥536m in the last year, which was a lot more than its statutory profit of CN¥64.8m. Notably, SINOPEC Shandong Taishan Pectroleum had negative free cash flow last year, so the CN¥536m it produced this year was a welcome improvement. 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 SINOPEC Shandong Taishan Pectroleum.

The Impact Of Unusual Items On Profit

SINOPEC Shandong Taishan Pectroleum's profit was reduced by unusual items worth CN¥22m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect SINOPEC Shandong Taishan Pectroleum to produce a higher profit next year, all else being equal.

Our Take On SINOPEC Shandong Taishan Pectroleum's Profit Performance

In conclusion, both SINOPEC Shandong Taishan Pectroleum's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think SINOPEC Shandong Taishan Pectroleum's underlying earnings potential is as good as, or probably even better, than the statutory profit makes it seem! So while earnings quality is important, it's equally important to consider the risks facing SINOPEC Shandong Taishan Pectroleum at this point in time. You'd be interested to know, that we found 1 warning sign for SINOPEC Shandong Taishan Pectroleum and you'll want to know about it.

After our examination into the nature of SINOPEC Shandong Taishan Pectroleum'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 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.