Shareholders In China Automotive Interior Decoration Holdings (HKG:48) Should Look Beyond Earnings For The Full Story

Investors were disappointed with China Automotive Interior Decoration Holdings Limited's (HKG:48) recent earnings release. We did some analysis and believe that they might be concerned about some weak underlying factors.

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Examining Cashflow Against China Automotive Interior Decoration Holdings' 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. 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.

Over the twelve months to June 2025, China Automotive Interior Decoration Holdings recorded an accrual ratio of 0.32. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of CN¥40.9m, a look at free cash flow indicates it actually burnt through CN¥4.1m in the last year. It's worth noting that China Automotive Interior Decoration Holdings generated positive FCF of CN¥11m a year ago, so at least they've done it in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

See our latest analysis for China Automotive Interior Decoration Holdings

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Automotive Interior Decoration Holdings.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that China Automotive Interior Decoration Holdings' profit was boosted by unusual items worth CN¥14m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. China Automotive Interior Decoration Holdings had a rather significant contribution from unusual items relative to its profit to June 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On China Automotive Interior Decoration Holdings' Profit Performance

China Automotive Interior Decoration Holdings had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue China Automotive Interior Decoration Holdings' profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 3 warning signs for China Automotive Interior Decoration Holdings (2 can't be ignored) you should be familiar with.

Our examination of China Automotive Interior Decoration Holdings 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. 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.