Shareholders In China Qinfa Group (HKG:866) Should Look Beyond Earnings For The Full Story

The latest earnings release from China Qinfa Group Limited (HKG:866 ) disappointed investors. We did some analysis and believe that they might be concerned about some weak underlying factors.

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Zooming In On China Qinfa Group'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 Qinfa Group recorded an accrual ratio of 0.57. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.4b despite its profit of CN¥563.9m, mentioned above. We also note that China Qinfa Group's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥1.4b. 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.

See our latest analysis for China Qinfa Group

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Qinfa Group.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by CN¥555m, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that China Qinfa Group's positive unusual items were quite significant relative to its profit in the year 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 Qinfa Group's Profit Performance

China Qinfa Group had a weak accrual ratio, but its profit did receive a boost from unusual items. On reflection, the above-mentioned factors give us the strong impression that China Qinfa Group'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into China Qinfa Group, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for China Qinfa Group you should be aware of.

Our examination of China Qinfa Group 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 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. 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.