Beijing Caishikou Department StoreLtd's (SHSE:605599) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Beijing Caishikou Department Store Co.,Ltd.'s (SHSE:605599) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Beijing Caishikou Department StoreLtd

Examining Cashflow Against Beijing Caishikou Department StoreLtd'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Beijing Caishikou Department StoreLtd had an accrual ratio of -0.15. 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¥883m in the last year, which was a lot more than its statutory profit of CN¥669.4m. Beijing Caishikou Department StoreLtd's free cash flow improved over the last year, which is generally good to see.

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 Beijing Caishikou Department StoreLtd's Profit Performance

As we discussed above, Beijing Caishikou Department StoreLtd has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Beijing Caishikou Department StoreLtd's statutory profit actually understates its earnings potential! And the EPS is up 65% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Beijing Caishikou Department StoreLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Beijing Caishikou Department StoreLtd'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.

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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.