Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's (SHSE:601952) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Jiangsu Provincial Agricultural Reclamation and Development Co.,Ltd.'s (SHSE:601952) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd

Examining Cashflow Against Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has an accrual ratio of -0.21 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥1.8b, well over the CN¥816.2m it reported in profit. Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's free cash flow improved over the last year, which is generally good to see. 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.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's profit was boosted by unusual items worth CN¥86m in the last twelve months. 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. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Profit Performance

Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Considering all the aforementioned, we'd venture that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So while earnings quality is important, it's equally important to consider the risks facing Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd at this point in time. While conducting our analysis, we found that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has 1 warning sign and it would be unwise to ignore this.

Our examination of Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd 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.