Statutory Profit Doesn't Reflect How Good Shanghai DOBE Cultural & Creative Industry Development (Group)Co's (SZSE:300947) Earnings Are

Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD.'s (SZSE:300947) earnings announcement last week was disappointing for investors, despite the decent profit numbers. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Shanghai DOBE Cultural & Creative Industry Development (Group)Co

A Closer Look At Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. 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 September 2024, Shanghai DOBE Cultural & Creative Industry Development (Group)Co recorded an accrual ratio of -0.39. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of CN¥577m, well over the CN¥28.2m it reported in profit. Shanghai DOBE Cultural & Creative Industry Development (Group)Co's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai DOBE Cultural & Creative Industry Development (Group)Co.

Our Take On Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Profit Performance

Happily for shareholders, Shanghai DOBE Cultural & Creative Industry Development (Group)Co produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Shanghai DOBE Cultural & Creative Industry Development (Group)Co's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Furthermore, it has done a great job growing EPS over the last year. 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. If you'd like to know more about Shanghai DOBE Cultural & Creative Industry Development (Group)Co as a business, it's important to be aware of any risks it's facing. For example, we've found that Shanghai DOBE Cultural & Creative Industry Development (Group)Co has 3 warning signs (2 can't be ignored!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Shanghai DOBE Cultural & Creative Industry Development (Group)Co'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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.