Why Beijing Trust&Far TechnologyLTD's (SZSE:300231) Shaky Earnings Are Just The Beginning Of Its Problems

Beijing Trust&Far Technology CO.,LTD's (SZSE:300231) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Beijing Trust&Far TechnologyLTD

A Closer Look At Beijing Trust&Far 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. 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'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Beijing Trust&Far TechnologyLTD has an accrual ratio of -0.16 for the year to March 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥404m in the last year, which was a lot more than its statutory profit of CN¥101.7m. Given that Beijing Trust&Far TechnologyLTD had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥404m would seem to be a step in the right direction. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beijing Trust&Far TechnologyLTD.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Beijing Trust&Far TechnologyLTD's profit was boosted by unusual items worth CN¥325m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Beijing Trust&Far TechnologyLTD had a rather significant contribution from unusual items relative to its profit to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Beijing Trust&Far TechnologyLTD's Profit Performance

Beijing Trust&Far TechnologyLTD's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Having considered these factors, we don't think Beijing Trust&Far TechnologyLTD's statutory profits give an overly harsh view of the business. If you want to do dive deeper into Beijing Trust&Far TechnologyLTD, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for Beijing Trust&Far TechnologyLTD and you'll want to know about these bad boys.

Our examination of Beijing Trust&Far TechnologyLTD has focussed on certain factors that can make its earnings look better than they are. 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.