Advanced Micro-Fabrication Equipment China's (SHSE:688012) Shareholders May Want To Dig Deeper Than Statutory Profit

The market for Advanced Micro-Fabrication Equipment Inc. China's (SHSE:688012) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, Advanced Micro-Fabrication Equipment China had an accrual ratio of 0.26. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.0b despite its profit of CN¥1.54b, mentioned above. We also note that Advanced Micro-Fabrication Equipment China's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥1.0b. 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.

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.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Advanced Micro-Fabrication Equipment China's profit was boosted by unusual items worth CN¥266m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If Advanced Micro-Fabrication Equipment China 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 Advanced Micro-Fabrication Equipment China's Profit Performance

Advanced Micro-Fabrication Equipment China had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Advanced Micro-Fabrication Equipment China's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Advanced Micro-Fabrication Equipment China, you'd also look into what risks it is currently facing. For example, we've found that Advanced Micro-Fabrication Equipment China has 2 warning signs (1 is potentially serious!) that deserve your attention before going any further with your analysis.

Our examination of Advanced Micro-Fabrication Equipment China 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 with significant insider holdings 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.