DuZhe Publish&MediaLtd's (SHSE:603999) Shareholders May Want To Dig Deeper Than Statutory Profit

DuZhe Publish&Media Co.,Ltd's (SHSE:603999) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

Check out our latest analysis for DuZhe Publish&MediaLtd

Examining Cashflow Against DuZhe Publish&MediaLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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.

DuZhe Publish&MediaLtd has an accrual ratio of -0.12 for the year to December 2023. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of CN¥190m in the last year, which was a lot more than its statutory profit of CN¥98.2m. DuZhe Publish&MediaLtd's free cash flow improved over the last year, which is generally good to see. Having said that it seems that a recent tax benefit and some unusual items have impacted its profit (and this its accrual ratio).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of DuZhe Publish&MediaLtd.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that DuZhe Publish&MediaLtd's profit was boosted by unusual items worth CN¥7.2m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

An Unusual Tax Situation

In addition to the notable accrual ratio, we can see that DuZhe Publish&MediaLtd received a tax benefit of CN¥20m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On DuZhe Publish&MediaLtd's Profit Performance

In conclusion, DuZhe Publish&MediaLtd's accrual ratio suggests its earnings are well backed by cash but its boost from unusual items, and a tax benefit, probably mean that the statutory number make the company seem more profitable than it is at an underlying level. After taking into account all the aforementioned observations we think that DuZhe Publish&MediaLtd's profits probably give a generous impression of its sustainable level of profitability. If you'd like to know more about DuZhe Publish&MediaLtd as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with DuZhe Publish&MediaLtd, and understanding it should be part of your investment process.

Our examination of DuZhe Publish&MediaLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.