ChinaEtek Service & Technology's (SZSE:301208) Weak Earnings May Only Reveal A Part Of The Whole Picture

The market rallied behind ChinaEtek Service & Technology Co., Ltd.'s (SZSE:301208) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

Check out our latest analysis for ChinaEtek Service & Technology

A Closer Look At ChinaEtek Service & Technology'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

ChinaEtek Service & Technology has an accrual ratio of 0.71 for the year to June 2024. 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. Over the last year it actually had negative free cash flow of CN¥216m, in contrast to the aforementioned profit of CN¥133.8m. It's worth noting that ChinaEtek Service & Technology generated positive FCF of CN¥84m 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 ChinaEtek Service & Technology.

Our Take On ChinaEtek Service & Technology's Profit Performance

As we discussed above, we think ChinaEtek Service & Technology's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that ChinaEtek Service & Technology's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. For instance, we've identified 3 warning signs for ChinaEtek Service & Technology (2 are concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of ChinaEtek Service & Technology'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 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.