We Think That There Are More Issues For COSCO SHIPPING Technology (SZSE:002401) Than Just Sluggish Earnings

The market wasn't impressed with the soft earnings from COSCO SHIPPING Technology Co., Ltd. (SZSE:002401) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

Check out our latest analysis for COSCO SHIPPING Technology

Examining Cashflow Against COSCO SHIPPING Technology's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, COSCO SHIPPING Technology had an accrual ratio of 0.68. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥145.8m, a look at free cash flow indicates it actually burnt through CN¥7.4m in the last year. It's worth noting that COSCO SHIPPING Technology generated positive FCF of CN¥56m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of COSCO SHIPPING Technology.

Our Take On COSCO SHIPPING Technology's Profit Performance

As we have made quite clear, we're a bit worried that COSCO SHIPPING Technology didn't back up the last year's profit with free cashflow. For this reason, we think that COSCO SHIPPING Technology's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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. 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 COSCO SHIPPING Technology (of which 1 shouldn't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of COSCO SHIPPING Technology's profit. 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 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.