China Bester Group Telecom's (SHSE:603220) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for China Bester Group Telecom Co., Ltd.'s (SHSE:603220) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for China Bester Group Telecom

Examining Cashflow Against China Bester Group Telecom'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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, China Bester Group Telecom had an accrual ratio of 0.61. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥187.6m, a look at free cash flow indicates it actually burnt through CN¥2.0b in the last year. We also note that China Bester Group Telecom's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥2.0b.

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 China Bester Group Telecom's Profit Performance

As we discussed above, we think China Bester Group Telecom's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that China Bester Group Telecom's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 50% per annum growth in EPS for the last three. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of China Bester Group Telecom.

This note has only looked at a single factor that sheds light on the nature of China Bester Group Telecom's profit. But there are plenty of other ways to inform your opinion of a company. 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.