Shareholders Can Be Confident That New Trend International Logis-TechLtd's (SZSE:300532) Earnings Are High Quality

New Trend International Logis-Tech Co.,Ltd.'s (SZSE:300532) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

View our latest analysis for New Trend International Logis-TechLtd

A Closer Look At New Trend International Logis-TechLtd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

New Trend International Logis-TechLtd has an accrual ratio of -0.43 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥596m, well over the CN¥388.2m it reported in profit. New Trend International Logis-TechLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of New Trend International Logis-TechLtd.

Our Take On New Trend International Logis-TechLtd's Profit Performance

As we discussed above, New Trend International Logis-TechLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think New Trend International Logis-TechLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing New Trend International Logis-TechLtd at this point in time. You'd be interested to know, that we found 1 warning sign for New Trend International Logis-TechLtd and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of New Trend International Logis-TechLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.