We Think Shanghai @hubLtd's (SHSE:603881) Solid Earnings Are Understated

Shanghai @hub Co.,Ltd.'s (SHSE:603881) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

View our latest analysis for Shanghai @hubLtd

Examining Cashflow Against Shanghai @hubLtd'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. 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. 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.

For the year to December 2023, Shanghai @hubLtd had an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CN¥808m during the period, dwarfing its reported profit of CN¥123.0m. Shanghai @hubLtd's free cash flow improved over the last year, which is generally good to see.

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 Shanghai @hubLtd's Profit Performance

Shanghai @hubLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Shanghai @hubLtd's earnings potential is at least as good as it seems, and maybe even better! At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Shanghai @hubLtd as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Shanghai @hubLtd and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Shanghai @hubLtd's profit. 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 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.