Qinghai Salt Lake IndustryLtd's (SZSE:000792) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with Qinghai Salt Lake Industry Co.,Ltd's (SZSE:000792) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Qinghai Salt Lake IndustryLtd

Examining Cashflow Against Qinghai Salt Lake IndustryLtd'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. 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.

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. 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.

Qinghai Salt Lake IndustryLtd has an accrual ratio of -0.19 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥11b in the last year, which was a lot more than its statutory profit of CN¥7.91b. Qinghai Salt Lake IndustryLtd's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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.

Our Take On Qinghai Salt Lake IndustryLtd's Profit Performance

As we discussed above, Qinghai Salt Lake IndustryLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Qinghai Salt Lake IndustryLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. While it's really important to consider how well a company's statutory earnings represent its true earnings power, it's also worth taking a look at what analysts are forecasting for the future. Luckily, you can check out what analysts are forecasting by clicking here.

This note has only looked at a single factor that sheds light on the nature of Qinghai Salt Lake IndustryLtd's profit. 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.