Statutory Profit Doesn't Reflect How Good Zhongxing Shenyang Commercial Building GroupLtd's (SZSE:000715) Earnings Are

The subdued stock price reaction suggests that Zhongxing Shenyang Commercial Building Group Co.,Ltd's (SZSE:000715) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Zhongxing Shenyang Commercial Building GroupLtd

A Closer Look At Zhongxing Shenyang Commercial Building GroupLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Zhongxing Shenyang Commercial Building GroupLtd has an accrual ratio of -0.19 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥262m in the last year, which was a lot more than its statutory profit of CN¥134.3m. Zhongxing Shenyang Commercial Building GroupLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Zhongxing Shenyang Commercial Building GroupLtd's Profit Performance

As we discussed above, Zhongxing Shenyang Commercial Building GroupLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Zhongxing Shenyang Commercial Building GroupLtd's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 39% 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 1 warning sign for Zhongxing Shenyang Commercial Building GroupLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Zhongxing Shenyang Commercial Building GroupLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.