Guangzhou Jiacheng International LogisticsLtd's (SHSE:603535) Shareholders Have More To Worry About Than Only Soft Earnings

Guangzhou Jiacheng International Logistics Co.,Ltd.'s (SHSE:603535) stock showed strength, with investors undeterred by its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Guangzhou Jiacheng International LogisticsLtd.

See our latest analysis for Guangzhou Jiacheng International LogisticsLtd

Examining Cashflow Against Guangzhou Jiacheng International LogisticsLtd'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). 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. The ratio shows us how much a company's profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2023, Guangzhou Jiacheng International LogisticsLtd had an accrual ratio of 0.46. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.0b despite its profit of CN¥164.3m, mentioned above. We also note that Guangzhou Jiacheng International LogisticsLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥1.0b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangzhou Jiacheng International LogisticsLtd.

Our Take On Guangzhou Jiacheng International LogisticsLtd's Profit Performance

As we discussed above, we think Guangzhou Jiacheng International LogisticsLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Guangzhou Jiacheng International LogisticsLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 1 warning sign for Guangzhou Jiacheng International LogisticsLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Guangzhou Jiacheng International LogisticsLtd'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 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.