We Think China Merchants Property Operation & Service's (SZSE:001914) Robust Earnings Are Conservative

When companies post strong earnings, the stock generally performs well, just like China Merchants Property Operation & Service Co., Ltd.'s (SZSE:001914) stock has recently. Our analysis found some more factors that we think are good for shareholders.

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Examining Cashflow Against China Merchants Property Operation & Service'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

Over the twelve months to December 2024, China Merchants Property Operation & Service recorded an accrual ratio of -0.14. 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¥1.8b during the period, dwarfing its reported profit of CN¥840.5m. Over the last year, China Merchants Property Operation & Service's free cash flow remained steady.

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 China Merchants Property Operation & Service's Profit Performance

As we discussed above, China Merchants Property Operation & Service has perfectly satisfactory free cash flow relative to profit. Because of this, we think China Merchants Property Operation & Service's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 64% per year over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing China Merchants Property Operation & Service at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of China Merchants Property Operation & Service.

Today we've zoomed in on a single data point to better understand the nature of China Merchants Property Operation & Service'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. 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.