Why Beijing Asiacom Information Technology Co.Ltd's (SZSE:301085) Shaky Earnings Are Just The Beginning Of Its Problems

The market wasn't impressed with the soft earnings from Beijing Asiacom Information Technology Co,.Ltd (SZSE:301085) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

Check out our latest analysis for Beijing Asiacom Information Technology Co.Ltd

Zooming In On Beijing Asiacom Information Technology Co.Ltd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. 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".

For the year to September 2024, Beijing Asiacom Information Technology Co.Ltd had an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥167m despite its profit of CN¥51.7m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥167m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beijing Asiacom Information Technology Co.Ltd.

Our Take On Beijing Asiacom Information Technology Co.Ltd's Profit Performance

Beijing Asiacom Information Technology Co.Ltd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Beijing Asiacom Information Technology Co.Ltd's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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. If you want to do dive deeper into Beijing Asiacom Information Technology Co.Ltd, you'd also look into what risks it is currently facing. Case in point: We've spotted 4 warning signs for Beijing Asiacom Information Technology Co.Ltd you should be mindful of and 3 of these make us uncomfortable.

This note has only looked at a single factor that sheds light on the nature of Beijing Asiacom Information Technology Co.Ltd'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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.