There May Be Some Bright Spots In Guangdong Tecsun Science & TechnologyLtd's (SZSE:002908) Earnings

The market was pleased with the recent earnings report from Guangdong Tecsun Science & Technology Co.,Ltd. (SZSE:002908), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

See our latest analysis for Guangdong Tecsun Science & TechnologyLtd

A Closer Look At Guangdong Tecsun Science & TechnologyLtd'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. 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2024, Guangdong Tecsun Science & TechnologyLtd recorded an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of CN¥141m during the period, dwarfing its reported profit of CN¥42.5m. Guangdong Tecsun Science & TechnologyLtd's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Tecsun Science & TechnologyLtd.

Our Take On Guangdong Tecsun Science & TechnologyLtd's Profit Performance

Guangdong Tecsun Science & TechnologyLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Guangdong Tecsun Science & TechnologyLtd's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Guangdong Tecsun Science & TechnologyLtd at this point in time. Case in point: We've spotted 1 warning sign for Guangdong Tecsun Science & TechnologyLtd you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Guangdong Tecsun Science & TechnologyLtd'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.