We Think That There Are More Issues For Asia-potash International Investment (Guangzhou)Co.Ltd (SZSE:000893) Than Just Sluggish Earnings

The subdued market reaction suggests that Asia-potash International Investment (Guangzhou)Co.,Ltd.'s (SZSE:000893) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for Asia-potash International Investment (Guangzhou)Co.Ltd

Examining Cashflow Against Asia-potash International Investment (Guangzhou)Co.Ltd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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, Asia-potash International Investment (Guangzhou)Co.Ltd had an accrual ratio of 0.28. 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. Even though it reported a profit of CN¥980.6m, a look at free cash flow indicates it actually burnt through CN¥2.4b in the last year. We also note that Asia-potash International Investment (Guangzhou)Co.Ltd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥2.4b.

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 Asia-potash International Investment (Guangzhou)Co.Ltd's Profit Performance

Asia-potash International Investment (Guangzhou)Co.Ltd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Asia-potash International Investment (Guangzhou)Co.Ltd's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Asia-potash International Investment (Guangzhou)Co.Ltd at this point in time. Be aware that Asia-potash International Investment (Guangzhou)Co.Ltd is showing 2 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

Today we've zoomed in on a single data point to better understand the nature of Asia-potash International Investment (Guangzhou)Co.Ltd's profit. 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 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.