We Think Shenzhen Friendcom Technology Development's (SZSE:300514) Robust Earnings Are Conservative

Shenzhen Friendcom Technology Development Co., Ltd.'s (SZSE:300514) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for Shenzhen Friendcom Technology Development

A Closer Look At Shenzhen Friendcom Technology Development'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Shenzhen Friendcom Technology Development has an accrual ratio of -0.33 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥339m, well over the CN¥191.6m it reported in profit. Given that Shenzhen Friendcom Technology Development had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥339m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenzhen Friendcom Technology Development.

Our Take On Shenzhen Friendcom Technology Development's Profit Performance

As we discussed above, Shenzhen Friendcom Technology Development's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Shenzhen Friendcom Technology Development's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Shenzhen Friendcom Technology Development.

This note has only looked at a single factor that sheds light on the nature of Shenzhen Friendcom Technology Development's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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 that insiders are buying 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.