Shaanxi Lighte Optoelectronics MaterialLtd's (SHSE:688150) Profits Appear To Have Quality Issues

Shaanxi Lighte Optoelectronics Material Co.,Ltd's (SHSE:688150) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Shaanxi Lighte Optoelectronics MaterialLtd

Zooming In On Shaanxi Lighte Optoelectronics MaterialLtd'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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Shaanxi Lighte Optoelectronics MaterialLtd has an accrual ratio of 0.23 for the year to March 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of CN¥102m, in contrast to the aforementioned profit of CN¥97.0m. We also note that Shaanxi Lighte Optoelectronics MaterialLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥102m. Having said that, there is more to the story. 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 Shaanxi Lighte Optoelectronics MaterialLtd's profit was boosted by unusual items worth CN¥9.6m in the last twelve months. 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. Which is hardly surprising, given the name. If Shaanxi Lighte Optoelectronics MaterialLtd 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 Shaanxi Lighte Optoelectronics MaterialLtd's Profit Performance

Shaanxi Lighte Optoelectronics MaterialLtd had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Shaanxi Lighte Optoelectronics MaterialLtd's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Shaanxi Lighte Optoelectronics MaterialLtd as a business, it's important to be aware of any risks it's facing. For example - Shaanxi Lighte Optoelectronics MaterialLtd has 1 warning sign we think you should be aware of.

Our examination of Shaanxi Lighte Optoelectronics MaterialLtd 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. Some people consider a high return on equity to be a good sign of a quality business. 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.