We Think That There Are Issues Underlying Shenzhen Kingkey Smart Agriculture TimesLtd's (SZSE:000048) Earnings

Shenzhen Kingkey Smart Agriculture Times Co.,Ltd (SZSE:000048) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Shenzhen Kingkey Smart Agriculture TimesLtd

Examining Cashflow Against Shenzhen Kingkey Smart Agriculture TimesLtd'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2023, Shenzhen Kingkey Smart Agriculture TimesLtd recorded an accrual ratio of 0.83. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥1.4b, in contrast to the aforementioned profit of CN¥1.75b. We also note that Shenzhen Kingkey Smart Agriculture TimesLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥1.4b.

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 Shenzhen Kingkey Smart Agriculture TimesLtd's Profit Performance

As we have made quite clear, we're a bit worried that Shenzhen Kingkey Smart Agriculture TimesLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Shenzhen Kingkey Smart Agriculture TimesLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 2 warning signs for Shenzhen Kingkey Smart Agriculture TimesLtd and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Shenzhen Kingkey Smart Agriculture TimesLtd's 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. 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.