Circuit Fabology Microelectronics EquipmentLtd's (SHSE:688630) Shareholders May Want To Dig Deeper Than Statutory Profit

Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) just released a solid earnings report, and the stock displayed some strength. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

See our latest analysis for Circuit Fabology Microelectronics EquipmentLtd

A Closer Look At Circuit Fabology Microelectronics EquipmentLtd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Circuit Fabology Microelectronics EquipmentLtd has an accrual ratio of 0.32 for the year to March 2024. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥122m despite its profit of CN¥185.6m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥122m, this year, indicates high risk. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Circuit Fabology Microelectronics EquipmentLtd increased the number of shares on issue by 8.8% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Circuit Fabology Microelectronics EquipmentLtd's historical EPS growth by clicking on this link.

A Look At The Impact Of Circuit Fabology Microelectronics EquipmentLtd's Dilution On Its Earnings Per Share (EPS)

As you can see above, Circuit Fabology Microelectronics EquipmentLtd has been growing its net income over the last few years, with an annualized gain of 127% over three years. But EPS was only up 52% per year, in the exact same period. And at a glance the 23% gain in profit over the last year impresses. On the other hand, earnings per share are only up 15% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Circuit Fabology Microelectronics EquipmentLtd shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Circuit Fabology Microelectronics EquipmentLtd's Profit Performance

In conclusion, Circuit Fabology Microelectronics EquipmentLtd has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. For the reasons mentioned above, we think that a perfunctory glance at Circuit Fabology Microelectronics EquipmentLtd's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Circuit Fabology Microelectronics EquipmentLtd as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for Circuit Fabology Microelectronics EquipmentLtd (1 is a bit concerning!) that we believe deserve your full attention.

Our examination of Circuit Fabology Microelectronics EquipmentLtd 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 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.