Solid Earnings Reflect Shanghai Yimin Commercial Group's (SHSE:600824) Strength As A Business

The subdued stock price reaction suggests that Shanghai Yimin Commercial Group Co., Ltd.'s (SHSE:600824) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for Shanghai Yimin Commercial Group

Examining Cashflow Against Shanghai Yimin Commercial Group'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Shanghai Yimin Commercial Group has an accrual ratio of -0.16 for the year to March 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CN¥264m during the period, dwarfing its reported profit of CN¥51.4m. Shanghai Yimin Commercial Group's free cash flow improved over the last year, which is generally good to see. 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 Yimin Commercial Group.

The Impact Of Unusual Items On Profit

Shanghai Yimin Commercial Group's profit was reduced by unusual items worth CN¥7.3m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Shanghai Yimin Commercial Group to produce a higher profit next year, all else being equal.

Our Take On Shanghai Yimin Commercial Group's Profit Performance

In conclusion, both Shanghai Yimin Commercial Group's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Looking at all these factors, we'd say that Shanghai Yimin Commercial Group's underlying earnings power is at least as good as the statutory numbers would make it seem. If you'd like to know more about Shanghai Yimin Commercial Group as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Shanghai Yimin Commercial Group and you'll want to know about it.

Our examination of Shanghai Yimin Commercial Group has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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 that insiders are buying 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.