We Think Shenzhen Friendcom Technology Development's (SZSE:300514) Healthy Earnings Might Be Conservative

Despite posting healthy earnings, Shenzhen Friendcom Technology Development Co., Ltd.'s (SZSE:300514 ) stock has been quite weak. Along with the solid headline numbers, we think that investors have some reasons for optimism.

Check out our latest analysis for Shenzhen Friendcom Technology Development

Examining Cashflow Against Shenzhen Friendcom Technology Development'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Shenzhen Friendcom Technology Development has an accrual ratio of -0.32 for the year to September 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CN¥341m during the period, dwarfing its reported profit of CN¥188.9m. Shenzhen Friendcom Technology Development 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 Shenzhen Friendcom Technology Development.

Our Take On Shenzhen Friendcom Technology Development's Profit Performance

Happily for shareholders, Shenzhen Friendcom Technology Development produced plenty of free cash flow to back up its statutory profit numbers. 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. 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. 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 are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.