Shanghai Zhongzhou Special Alloy Materials' (SZSE:300963) Shareholders Have More To Worry About Than Only Soft Earnings

The subdued market reaction suggests that Shanghai Zhongzhou Special Alloy Materials Co., Ltd.'s (SZSE:300963) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Shanghai Zhongzhou Special Alloy Materials

A Closer Look At Shanghai Zhongzhou Special Alloy Materials' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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

Shanghai Zhongzhou Special Alloy Materials has an accrual ratio of 0.26 for the year to March 2024. 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¥76.8m, a look at free cash flow indicates it actually burnt through CN¥180m in the last year. We also note that Shanghai Zhongzhou Special Alloy Materials' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥180m.

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 Shanghai Zhongzhou Special Alloy Materials' Profit Performance

Shanghai Zhongzhou Special Alloy Materials didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Shanghai Zhongzhou Special Alloy Materials' statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Shanghai Zhongzhou Special Alloy Materials at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Shanghai Zhongzhou Special Alloy Materials (including 1 which is concerning).

Today we've zoomed in on a single data point to better understand the nature of Shanghai Zhongzhou Special Alloy Materials' profit. But there are plenty of other ways to inform your opinion of a company. 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.