We're Not So Sure You Should Rely on Ganglong China Property Group's (HKG:6968) Statutory Earnings

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Ganglong China Property Group's (HKG:6968) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Ganglong China Property Group made a profit of CN¥1.05b on revenue of CN¥3.10b.

View our latest analysis for Ganglong China Property Group

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. So today we'll look at what Ganglong China Property Group's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ganglong China Property Group.

Examining Cashflow Against Ganglong China Property Group'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.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Ganglong China Property Group has an accrual ratio of 0.53 for the year to June 2020. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥1.05b, a look at free cash flow indicates it actually burnt through CN¥3.7b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥3.7b, this year, indicates high risk.

Our Take On Ganglong China Property Group's Profit Performance

As we have made quite clear, we're a bit worried that Ganglong China Property Group didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Ganglong China Property Group's underlying earnings power is lower than its statutory profit. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Ganglong China Property Group as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Ganglong China Property Group you should know about.

This note has only looked at a single factor that sheds light on the nature of Ganglong China Property Group's profit. 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. 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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