Joy Spreader Interactive TechnologyLtd (HKG:6988) Is Growing Earnings But Are They A Good Guide?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Joy Spreader Interactive TechnologyLtd (HKG:6988).

It's good to see that over the last twelve months Joy Spreader Interactive TechnologyLtd made a profit of CN¥101.3m on revenue of CN¥612.3m. At the risk of seeming quaint, we do like to at least examine profit, even when a stock is improving revenue and considered a 'growth stock'. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Joy Spreader Interactive TechnologyLtd

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a result, we think it's well worth considering what Joy Spreader Interactive TechnologyLtd's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Zooming In On Joy Spreader Interactive TechnologyLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2020, Joy Spreader Interactive TechnologyLtd had an accrual ratio of 0.55. 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¥55m despite its profit of CN¥101.3m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥55m, this year, indicates high risk.

Our Take On Joy Spreader Interactive TechnologyLtd's Profit Performance

As we discussed above, we think Joy Spreader Interactive TechnologyLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Joy Spreader Interactive TechnologyLtd's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 68% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Joy Spreader Interactive TechnologyLtd (of which 1 is significant!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Joy Spreader Interactive TechnologyLtd'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. 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.
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