Guangzhou Grandbuy (SZSE:002187) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Despite posting some strong earnings, the market for Guangzhou Grandbuy Co., Ltd.'s (SZSE:002187) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Guangzhou Grandbuy

A Closer Look At Guangzhou Grandbuy'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. 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 December 2023, Guangzhou Grandbuy had an accrual ratio of 0.27. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥447m, in contrast to the aforementioned profit of CN¥36.2m. It's worth noting that Guangzhou Grandbuy generated positive FCF of CN¥266m a year ago, so at least they've done it in the past. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangzhou Grandbuy.

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by CN¥5.1m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If Guangzhou Grandbuy doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Guangzhou Grandbuy's Profit Performance

Guangzhou Grandbuy had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Guangzhou Grandbuy's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Guangzhou Grandbuy as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Guangzhou Grandbuy has 2 warning signs and it would be unwise to ignore these.

Our examination of Guangzhou Grandbuy has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.