Are Bafang Yunji International's (GTSM:2753) Statutory Earnings A Good Reflection Of Its Earnings Potential?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. This article will consider whether Bafang Yunji International's (GTSM:2753) statutory profits are a good guide to its underlying earnings.

We like the fact that Bafang Yunji International made a profit of NT$547.5m on its revenue of NT$4.94b, in the last year.

Check out our latest analysis for Bafang Yunji International

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 Bafang Yunji International'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 Bafang Yunji International.

A Closer Look At Bafang Yunji International's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".

Over the twelve months to June 2020, Bafang Yunji International recorded an accrual ratio of -0.18. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$734m in the last year, which was a lot more than its statutory profit of NT$547.5m. Bafang Yunji International shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Bafang Yunji International's Profit Performance

As we discussed above, Bafang Yunji International's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Bafang Yunji International's statutory profit actually understates its earnings potential! And the EPS is up 13% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Bafang Yunji International as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Bafang Yunji International you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Bafang Yunji International'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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