Guangdong Tianhe Agricultural Means of Production's (SZSE:002999) Shareholders Have More To Worry About Than Only Soft Earnings

The market wasn't impressed with the soft earnings from Guangdong Tianhe Agricultural Means of Production Co., Ltd. (SZSE:002999) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

View our latest analysis for Guangdong Tianhe Agricultural Means of Production

A Closer Look At Guangdong Tianhe Agricultural Means of Production'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.

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.

Over the twelve months to September 2024, Guangdong Tianhe Agricultural Means of Production recorded an accrual ratio of 0.21. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of CN¥51.3m, a look at free cash flow indicates it actually burnt through CN¥565m in the last year. We also note that Guangdong Tianhe Agricultural Means of Production's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥565m. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Tianhe Agricultural Means of Production.

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by CN¥22m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If Guangdong Tianhe Agricultural Means of Production doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Guangdong Tianhe Agricultural Means of Production's Profit Performance

Summing up, Guangdong Tianhe Agricultural Means of Production received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Guangdong Tianhe Agricultural Means of Production's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Guangdong Tianhe Agricultural Means of Production as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with Guangdong Tianhe Agricultural Means of Production (including 3 which are a bit concerning).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.