Shareholders In CCCC Design & Consulting Group (SHSE:600720) Should Look Beyond Earnings For The Full Story

The latest earnings release from CCCC Design & Consulting Group Co., Ltd. (SHSE:600720 ) disappointed investors. We did some analysis and believe that they might be concerned about some weak underlying factors.

View our latest analysis for CCCC Design & Consulting Group

A Closer Look At CCCC Design & Consulting Group'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, CCCC Design & Consulting Group recorded an accrual ratio of 0.34. 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. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.1b despite its profit of CN¥1.79b, mentioned above. We saw that FCF was CN¥599m a year ago though, so CCCC Design & Consulting Group has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, CCCC Design & Consulting Group increased the number of shares on issue by 166% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of CCCC Design & Consulting Group's EPS by clicking here.

A Look At The Impact Of CCCC Design & Consulting Group's Dilution On Its Earnings Per Share (EPS)

CCCC Design & Consulting Group has improved its profit over the last three years, with an annualized gain of 22% in that time. But on the other hand, earnings per share actually fell by 39% per year. And at a glance the 134% gain in profit over the last year impresses. But in comparison, EPS only increased by 18% over the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So CCCC Design & Consulting Group shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On CCCC Design & Consulting Group's Profit Performance

In conclusion, CCCC Design & Consulting Group has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue CCCC Design & Consulting Group's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've found that CCCC Design & Consulting Group has 3 warning signs (2 shouldn't be ignored!) that deserve your attention before going any further with your analysis.

Our examination of CCCC Design & Consulting Group 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.

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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.