We Think That There Are More Issues For Sichuan Jiuyuan Yinhai Software.Co.Ltd (SZSE:002777) Than Just Sluggish Earnings

The market wasn't impressed with the soft earnings from Sichuan Jiuyuan Yinhai Software.Co.,Ltd (SZSE:002777) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

See our latest analysis for Sichuan Jiuyuan Yinhai Software.Co.Ltd

A Closer Look At Sichuan Jiuyuan Yinhai Software.Co.Ltd'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Sichuan Jiuyuan Yinhai Software.Co.Ltd has an accrual ratio of 0.20 for the year to December 2023. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In fact, it had free cash flow of CN¥34m in the last year, which was a lot less than its statutory profit of CN¥167.9m. Given that Sichuan Jiuyuan Yinhai Software.Co.Ltd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥34m would seem to be a step in the right direction.

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 Sichuan Jiuyuan Yinhai Software.Co.Ltd's Profit Performance

Sichuan Jiuyuan Yinhai Software.Co.Ltd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Sichuan Jiuyuan Yinhai Software.Co.Ltd's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Sichuan Jiuyuan Yinhai Software.Co.Ltd has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Sichuan Jiuyuan Yinhai Software.Co.Ltd's profit. 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. 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.