Xi'an Peri Power Semiconductor Converting TechnologyLtd (SZSE:300831) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Xi'an Peri Power Semiconductor Converting Technology Co.,Ltd.'s (SZSE:300831) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Xi'an Peri Power Semiconductor Converting TechnologyLtd

A Closer Look At Xi'an Peri Power Semiconductor Converting TechnologyLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

Xi'an Peri Power Semiconductor Converting TechnologyLtd has an accrual ratio of 0.26 for the year to June 2024. 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¥26m despite its profit of CN¥61.4m, mentioned above. It's worth noting that Xi'an Peri Power Semiconductor Converting TechnologyLtd generated positive FCF of CN¥22m a year ago, so at least they've done it in the past. 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Xi'an Peri Power Semiconductor Converting TechnologyLtd.

How Do Unusual Items Influence Profit?

Unfortunately (in the short term) Xi'an Peri Power Semiconductor Converting TechnologyLtd saw its profit reduced by unusual items worth CN¥9.2m. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Xi'an Peri Power Semiconductor Converting TechnologyLtd to produce a higher profit next year, all else being equal.

Our Take On Xi'an Peri Power Semiconductor Converting TechnologyLtd's Profit Performance

In conclusion, Xi'an Peri Power Semiconductor Converting TechnologyLtd's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Having considered these factors, we don't think Xi'an Peri Power Semiconductor Converting TechnologyLtd's statutory profits give an overly harsh view of the business. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 2 warning signs for Xi'an Peri Power Semiconductor Converting TechnologyLtd you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.