Statutory Profit Doesn't Reflect How Good Vanfund Urban Investment and Development's (SZSE:000638) Earnings Are

When companies post strong earnings, the stock generally performs well, just like Vanfund Urban Investment and Development Co., Ltd.'s (SZSE:000638) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

Check out our latest analysis for Vanfund Urban Investment and Development

A Closer Look At Vanfund Urban Investment and Development'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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Over the twelve months to September 2024, Vanfund Urban Investment and Development recorded an accrual ratio of 0.28. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥20.0m, a look at free cash flow indicates it actually burnt through CN¥40m in the last year. We also note that Vanfund Urban Investment and Development's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥40m. 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 Vanfund Urban Investment and Development.

The Impact Of Unusual Items On Profit

Vanfund Urban Investment and Development's profit suffered from unusual items, which reduced profit by CN¥33m in the last twelve months. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. 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. Vanfund Urban Investment and Development took a rather significant hit from unusual items in the year to September 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Vanfund Urban Investment and Development's Profit Performance

In conclusion, Vanfund Urban Investment and Development's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Considering all the aforementioned, we'd venture that Vanfund Urban Investment and Development's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Vanfund Urban Investment and Development as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Vanfund Urban Investment and Development you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 with high insider ownership.

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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.