Statutory Profit Doesn't Reflect How Good Suzhou Kingswood Education Technology's (SZSE:300192) Earnings Are

Suzhou Kingswood Education Technology Co., Ltd.'s (SZSE:300192) strong earnings report was rewarded with a positive stock price move. We have done some analysis, and we found several positive factors beyond the profit numbers.

View our latest analysis for Suzhou Kingswood Education Technology

A Closer Look At Suzhou Kingswood Education Technology's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Suzhou Kingswood Education Technology has an accrual ratio of -0.19 for the year to March 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥216m in the last year, which was a lot more than its statutory profit of CN¥143.5m. Over the last year, Suzhou Kingswood Education Technology's free cash flow remained steady.

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 Suzhou Kingswood Education Technology's Profit Performance

As we discussed above, Suzhou Kingswood Education Technology's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Suzhou Kingswood Education Technology's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 50% over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Suzhou Kingswood Education Technology as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Suzhou Kingswood Education Technology and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Suzhou Kingswood Education Technology's profit. 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 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.