GDH Supertime Group's (SZSE:001338) Earnings May Just Be The Starting Point

GDH Supertime Group Company Limited's (SZSE:001338) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

Check out our latest analysis for GDH Supertime Group

Zooming In On GDH Supertime Group'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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, GDH Supertime Group had an accrual ratio of -0.61. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥2.3b in the last year, which was a lot more than its statutory profit of CN¥220.6m. GDH Supertime Group did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. 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 GDH Supertime Group.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that GDH Supertime Group's profit was boosted by unusual items worth CN¥19m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 GDH Supertime Group doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On GDH Supertime Group's Profit Performance

GDH Supertime Group'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. Based on these factors, we think that GDH Supertime Group's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into GDH Supertime Group, you'd also look into what risks it is currently facing. While conducting our analysis, we found that GDH Supertime Group has 1 warning sign and it would be unwise to ignore it.

Our examination of GDH Supertime Group 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. 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.