San Yang Ma (Chongqing) LogisticsLtd's (SZSE:001317) Profits May Not Reveal Underlying Issues

San Yang Ma (Chongqing) Logistics Co.,Ltd.'s (SZSE:001317) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for San Yang Ma (Chongqing) LogisticsLtd

Zooming In On San Yang Ma (Chongqing) LogisticsLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

San Yang Ma (Chongqing) LogisticsLtd has an accrual ratio of 0.21 for the year to March 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of CN¥152m, in contrast to the aforementioned profit of CN¥18.6m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥152m, this year, indicates high risk. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of San Yang Ma (Chongqing) LogisticsLtd.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that San Yang Ma (Chongqing) LogisticsLtd's profit was boosted by unusual items worth CN¥2.0m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If San Yang Ma (Chongqing) LogisticsLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On San Yang Ma (Chongqing) LogisticsLtd's Profit Performance

San Yang Ma (Chongqing) LogisticsLtd had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at San Yang Ma (Chongqing) LogisticsLtd's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing San Yang Ma (Chongqing) LogisticsLtd at this point in time. At Simply Wall St, we found 2 warning signs for San Yang Ma (Chongqing) LogisticsLtd and we think they deserve your attention.

Our examination of San Yang Ma (Chongqing) LogisticsLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 that insiders are buying.

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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.