Sharetronic Data Technology's (SZSE:300857) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, Sharetronic Data Technology Co., Ltd.'s (SZSE:300857) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

Check out our latest analysis for Sharetronic Data Technology

Zooming In On Sharetronic Data 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. 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.

Over the twelve months to September 2024, Sharetronic Data Technology recorded an accrual ratio of 0.63. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥766m, in contrast to the aforementioned profit of CN¥648.5m. It's worth noting that Sharetronic Data Technology generated positive FCF of CN¥157m a year ago, so at least they've done it in the past.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Sharetronic Data Technology's Profit Performance

As we have made quite clear, we're a bit worried that Sharetronic Data Technology didn't back up the last year's profit with free cashflow. For this reason, we think that Sharetronic Data Technology's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you'd like to know more about Sharetronic Data Technology as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Sharetronic Data Technology has 3 warning signs and it would be unwise to ignore them.

Today we've zoomed in on a single data point to better understand the nature of Sharetronic Data Technology'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. 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.