We Don’t Think CCCC Design & Consulting Group's (SHSE:600720) Earnings Should Make Shareholders Too Comfortable

Solid profit numbers didn't seem to be enough to please CCCC Design & Consulting Group Co., Ltd.'s (SHSE:600720) shareholders. We think that they might be concerned about some underlying details that our analysis found.

View our latest analysis for CCCC Design & Consulting Group

Examining Cashflow Against CCCC Design & Consulting Group's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, CCCC Design & Consulting Group had an accrual ratio of 0.45. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.9b despite its profit of CN¥1.98b, mentioned above. We saw that FCF was CN¥113m a year ago though, so CCCC Design & Consulting Group has at least been able to generate positive FCF in the past. Notably, the company has issued new shares, thus diluting existing shareholders and reducing 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. CCCC Design & Consulting Group expanded the number of shares on issue by 196% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out CCCC Design & Consulting Group's historical EPS growth by clicking on this link.

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 110% in that time. In contrast, earnings per share were actually down by 21% per year, in the exact same period. And at a glance the 22% gain in profit over the last year impresses. But earnings per share are actually down 9.0%, over the last twelve months. So you can see that the dilution has had a fairly significant impact on shareholders.

If CCCC Design & Consulting Group's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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 that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). On reflection, the above-mentioned factors give us the strong impression that CCCC Design & Consulting Group'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. 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. To that end, you should learn about the 3 warning signs we've spotted with CCCC Design & Consulting Group (including 2 which are significant).

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 is always more to discover if you are capable of focussing your mind on minutiae. 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. 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 with significant insider holdings 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.