Advanced Micro-Fabrication Equipment China (SHSE:688012) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Advanced Micro-Fabrication Equipment China

A Closer Look At Advanced Micro-Fabrication Equipment China's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Advanced Micro-Fabrication Equipment China has an accrual ratio of 0.55 for the year to December 2023. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥2.2b, in contrast to the aforementioned profit of CN¥1.79b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥2.2b, this year, indicates high risk.

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 Advanced Micro-Fabrication Equipment China's Profit Performance

As we have made quite clear, we're a bit worried that Advanced Micro-Fabrication Equipment China didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Advanced Micro-Fabrication Equipment China's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate 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. If you want to do dive deeper into Advanced Micro-Fabrication Equipment China, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Advanced Micro-Fabrication Equipment China and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Advanced Micro-Fabrication Equipment China's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.