We Don’t Think Xinjiang Sayram Modern Agriculture's (SHSE:600540) Earnings Should Make Shareholders Too Comfortable

Shareholders didn't seem to be thrilled with Xinjiang Sayram Modern Agriculture Co., Ltd's (SHSE:600540) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.

See our latest analysis for Xinjiang Sayram Modern Agriculture

Zooming In On Xinjiang Sayram Modern Agriculture'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Xinjiang Sayram Modern Agriculture has an accrual ratio of 0.31 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of CN¥375m, in contrast to the aforementioned profit of CN¥16.2m. It's worth noting that Xinjiang Sayram Modern Agriculture generated positive FCF of CN¥544m a year ago, so at least they've done it in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. The good news for shareholders is that Xinjiang Sayram Modern Agriculture'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 Xinjiang Sayram Modern Agriculture.

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by CN¥61m, in the last year, probably goes some way to explain why its accrual ratio was so weak. 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. Xinjiang Sayram Modern Agriculture had a rather significant contribution from unusual items relative to its profit to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Xinjiang Sayram Modern Agriculture's Profit Performance

Xinjiang Sayram Modern Agriculture had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Xinjiang Sayram Modern Agriculture's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Xinjiang Sayram Modern Agriculture as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Xinjiang Sayram Modern Agriculture you should be aware of.

Our examination of Xinjiang Sayram Modern Agriculture has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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. 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.

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.