Solid Earnings Reflect Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's (SHSE:600663) Strength As A Business

Investors were underwhelmed by the solid earnings posted by Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd. (SHSE:600663) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

See our latest analysis for Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd

Zooming In On Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2024, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd recorded an accrual ratio of -0.10. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of CN¥11b during the period, dwarfing its reported profit of CN¥914.0m. Given that Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥11b would seem to be a step in the right direction.

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 Lujiazui Finance & Trade Zone DevelopmentLtd's Profit Performance

As we discussed above, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 42% over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 3 warning signs with Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd'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. 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.