Why Guangdong Syntrust GK Testing and Certification Tech Service Center's (HKG:8629) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Guangdong Syntrust GK Testing and Certification Tech Service Center Co., Ltd.'s (HKG:8629) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

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Zooming In On Guangdong Syntrust GK Testing and Certification Tech Service Center'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). 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2025, Guangdong Syntrust GK Testing and Certification Tech Service Center recorded an accrual ratio of 0.42. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥10.3m, a look at free cash flow indicates it actually burnt through CN¥22m in the last year. We saw that FCF was CN¥8.2m a year ago though, so Guangdong Syntrust GK Testing and Certification Tech Service Center has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Syntrust GK Testing and Certification Tech Service Center.

Our Take On Guangdong Syntrust GK Testing and Certification Tech Service Center's Profit Performance

As we have made quite clear, we're a bit worried that Guangdong Syntrust GK Testing and Certification Tech Service Center didn't back up the last year's profit with free cashflow. For this reason, we think that Guangdong Syntrust GK Testing and Certification Tech Service Center'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. If you'd like to know more about Guangdong Syntrust GK Testing and Certification Tech Service Center as a business, it's important to be aware of any risks it's facing. For example, we've found that Guangdong Syntrust GK Testing and Certification Tech Service Center has 3 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Guangdong Syntrust GK Testing and Certification Tech Service Center's profit. 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 with high insider ownership.

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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.