Shanghai Golden Union Commercial ManagementLtd's (SHSE:603682) Conservative Accounting Might Explain Soft Earnings

The subdued market reaction suggests that Shanghai Golden Union Commercial Management Co.,Ltd.'s (SHSE:603682) 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 Golden Union Commercial ManagementLtd

Examining Cashflow Against Shanghai Golden Union Commercial ManagementLtd'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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Shanghai Golden Union Commercial ManagementLtd has an accrual ratio of -0.65 for the year to June 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥638m in the last year, which was a lot more than its statutory profit of CN¥36.6m. Shanghai Golden Union Commercial ManagementLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Golden Union Commercial ManagementLtd.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Shanghai Golden Union Commercial ManagementLtd's profit was boosted by unusual items worth CN¥65m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Shanghai Golden Union Commercial ManagementLtd had a rather significant contribution from unusual items relative to its profit to June 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Shanghai Golden Union Commercial ManagementLtd's Profit Performance

In conclusion, Shanghai Golden Union Commercial ManagementLtd's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Shanghai Golden Union Commercial ManagementLtd's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Shanghai Golden Union Commercial ManagementLtd, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Shanghai Golden Union Commercial ManagementLtd (1 is a bit unpleasant) you should be familiar with.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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 with significant insider holdings 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.