Fortune Ng Fung Food (Hebei)Ltd's (SHSE:600965) Problems Go Beyond Weak Profit

The subdued market reaction suggests that Fortune Ng Fung Food (Hebei) Co.,Ltd's (SHSE:600965) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Check out our latest analysis for Fortune Ng Fung Food (Hebei)Ltd

Examining Cashflow Against Fortune Ng Fung Food (Hebei)Ltd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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.

Fortune Ng Fung Food (Hebei)Ltd has an accrual ratio of 0.27 for the year to March 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of CN¥429m, in contrast to the aforementioned profit of CN¥62.9m. We also note that Fortune Ng Fung Food (Hebei)Ltd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥429m. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fortune Ng Fung Food (Hebei)Ltd.

The Impact Of Unusual Items On Profit

Fortune Ng Fung Food (Hebei)Ltd's profit suffered from unusual items, which reduced profit by CN¥25m in the last twelve months. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Fortune Ng Fung Food (Hebei)Ltd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Fortune Ng Fung Food (Hebei)Ltd's Profit Performance

Fortune Ng Fung Food (Hebei)Ltd saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Given the contrasting considerations, we don't have a strong view as to whether Fortune Ng Fung Food (Hebei)Ltd's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Fortune Ng Fung Food (Hebei)Ltd as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 4 warning signs for Fortune Ng Fung Food (Hebei)Ltd you should be mindful of and 2 of these are a bit unpleasant.

Our examination of Fortune Ng Fung Food (Hebei)Ltd has focussed on certain factors that can make its earnings look better than they are. 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. 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.